SLO Town Savings and Loan

Abstract

Abstract Until students understand the need for financial accounting standards (FAS), those standards are merely rules that must be learned. Events in the savings and loan (S&L) industry provide examples to which students can relate and which demonstrate the need for accounting standards. Such a need arises because producers of financial information often have different objectives than external users of the information. Loan origination fees illustrate such a difference. Savings and loan managers argued that loan origination fees were revenue, while others argued that origination fees should be treated as adjustments to the yields of mortgages. Prior to FAS No. 65, loan origination fees were reported as revenue at the time mortgages were created, a treatment with which most S&L managers agreed. As problems arose in the savings and loan industry, the needs of external financial statement users became evident, and the FASB issued Statement No. 65 in an effort to address the controversy surrounding the reporting of loan origination fees. Subsequently, FAS No. 91 reconsidered the issue and further refined the reporting standards. The SLO Town Savings and Loan case illustrates the significance of the issues related to origination fees, the impact of accounting standards on management preferences for particular financial transactions, and the evolution of a financial reporting standard.