The Financial Accounting Standards Board today issued its final standard outlining how banks can adjust regulatory capital balances that were affected by the new tax reform law. The issuance of the standard marks a win for the American Bankers Association, which first raised the issue to FASB in December and participated in a vigorous advocacy effort in support of the change. Companies will be able to apply the standard 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 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. Under the standard, financial statement preparers are required to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income tax effects from the tax reform bill and information about other income tax effects that are reclassified.