ABA Urges Agencies to Consider Effects of Tax Reform on Accounting, Capital

With the tax reform law now in effect, the American Bankers Association today wrote to the heads of the federal banking agencies and the Securities and Exchange Commission urging them to carefully consider the short- and long-term effects tax reform will have on banks’ net income, regulatory capital and financial reporting. The association encouraged regulators to exercise flexibility when conducting upcoming examinations of bank management and asset quality.

Under GAAP, banks must immediately reevaluate deferred tax assets and liabilities, with the difference recorded through net income. ABA estimates that as a result of these reevaluations, some banks could see net operating losses, and a very few could be in danger of prompt corrective action. The association pointed out, however, that these downward revisions should not affect the safety and soundness of individual banks or the financial system as a whole, and added that the long-term effects of increased economic growth could more than offset these short-term negative adjustments.

With these year-end adjustments expected to affect banks’ dividend distributions, ABA called for guidance to help bankers determine how to proceed with their dividend and capital management plans. ABA also called on regulators to engage with the Financial Accounting Standards Board to pursue changes to current standards that would allow companies to recognize the effects of lower tax rates on DTAs and DTLs related to items within accumulated other comprehensive income — which the association previously advocated for in a comment letter to FASB.

Finally, ABA called for the agencies to issue additional guidance on year-end reporting and documentation expectations, to help banks maintain strong internal controls as the tax reform accounting changes take place. For more information, contact ABA’s Mike Gullette or Josh Stein.