In a comment letter to the Financial Accounting Standards Board today, the American Bankers Association offered its full support for a proposal to adjust regulatory capital balances that were unexpectedly affected by the new tax reform law. The association recommended that the proposal be approved immediately and that early adoption be permitted so that companies may apply the new standard to their 2017 reporting results.
Under current tax accounting, the reduction of deferred tax assets and liabilities are recorded entirely within net income, including those applying to items in accumulated other comprehensive income such as unrealized gains and losses on available-for-sale securities. As a result, not only are net income and regulatory capital distorted, but this treatment also creates onerous operational burdens to track the related amounts in the future. While the FASB proposal will not change the impact to net income, the proposed adjustment between AOCI and retained earnings will allow ending regulatory capital to be appropriately stated and also avoid onerous operational requirements to keep track of the amounts that would have been “stranded” within AOCI.
ABA noted that the reclassification of the stranded tax effects from AOCI to retained earnings represents “a good operational solution and provides a truer economic picture than the current guidance.” The association also encouraged FASB to explore backwards tracing as a long term solution.
Comments on the proposal are being accepted through Feb. 2, and bankers are encouraged to submit their own comments in support of the proposal. For more information, contact ABA’s Mike Gullette or Josh Stein.