June 17, 2002 Re: Application of the Fixed Asset Rule to Data Processing Contracts. Dear : You have asked if a multi-year contract for data processing must be considered a lease and, therefore, included as a fixed asset for purposes of our fixed asset rule that limits federal credit union (FCU) ownership of fixed assets. 12 C.F.R. §701.36(c)(1). Payments for data processing contracts are subject to our fixed asset rule because the contract depends on the use or lease of computer hardware and software, which is considered an investment in fixed assets. The fixed asset rule provides that “[n]o FCU . . . without the prior approval of NCUA, shall invest in fixed assets if the aggregate of all such investments exceeds 5 percent of the FCU’s shares and retained earnings.” Id. An FCU must comply with the fixed asset rule unless the FCU is under $1,000,000 in assets or is exempt under NCUA’s Regulatory Flexibility Program. Id.; 12 C.F.R. Part 742. “Fixed assets” includes computer hardware and software. 12 C.F.R. §701.36(b)(2), (3). “Investment in fixed assets” means not only the purchase of fixed assets but also “the aggregate of all capital and operating lease payments pursuant to lease agreements for fixed assets.” 12 C.F.R. §701.36(b)(4)(iii). Data processing requires substantial use of computer hardware and software. In the preamble to the final fixed asset rule, the NCUA Board addressed the treatment of data processing contracts as follows:
54 Fed. Reg. 18466 (May 1, 1989). In our view, unless an FCU can separate fixed asset payments, including payments for the use of hardware and software, from payments made for non-fixed assets, it must count its entire financial commitment under a data processing contract towards the fixed asset rule’s 5% limitation. The burden is on the FCU to support and document any segregation of payments into fixed asset and non-fixed asset categories. Sincerely,
Sheila A. Albin GC/PMP:bhs cc: Regional Director, Region II |