The Financial Accounting Standards Board today approved a highly anticipated proposal for adjusting regulatory capital balances that were affected by the new tax reform law, an issue that was first raised by the American Bankers Association in a letter to FASB in December. Companies will be able to apply the final standard — which is expected to be issued publicly in the coming days — to their 2017 reporting results.
Under current tax accounting, the reductions 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 affected, but this treatment also creates onerous operational burdens to track the related amounts in the future.
While the new standard 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 and all 52 state bankers associations previously supported the proposal, noting that it offers “a good operational solution.” For more information, contact ABA’s Josh Stein, Mike Gullette or John Kinsella.