The Financial Accounting Standards Board has announced that it will issue a proposal in the coming days to adjust regulatory capital balances that were unexpectedly affected by the new tax reform law. Citing year-end reporting concerns, FASB plans to issue the exposure draft next week with a two-week comment period, in an effort to have a draft finalized in time for companies to apply the new standard to their 2017 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 first expressed its concerns to FASB in December, and trade groups representing both the property/casualty insurance and life insurance industries have since supported the ABA letter. For more information, contact ABA’s Mike Gullette, Josh Stein or John Kinsella.