The Financial Accounting Standards Board has issued a highly anticipated draft proposal for adjusting regulatory capital balances that were unexpectedly affected by the new tax reform law. Citing year-end reporting concerns, FASB issued the draft with a 15-day comment period in an effort to finalize the proposal in time for companies to apply the new standard to their 2017 results. Comments are due Feb. 2.
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.
Concurrently, the federal banking agencies today also issued a joint statement on the accounting and reporting implications of the new tax law. The statement allows for the adoption of FASB’s proposal for regulatory reporting of Dec. 31, 2017, financial information (which is due on Jan. 30).
ABA has played a key role in communicating concerns to FASB and the regulatory agencies about the accounting implications of tax reform. The association first raised the issue in a letter to FASB in December, which led to a meeting on Jan. 10 to discuss the need for changes to in current accounting standards. For more information, contact ABA’s Mike Gullette or Josh Stein.