All 52 state bankers associations wrote to the Financial Accounting Standards Board on Friday in support of a proposal to adjust regulatory capital balances that were unexpectedly affected by the new tax reform law. The associations echoed previous calls by the American Bankers Association for the proposal to be approved immediately, with early adoption permitted so that companies may apply the new standard to their 2017 reporting 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.
The associations noted that the reclassification of the stranded tax effects from AOCI to retained earnings is “a good operational solution,” and also supported an ABA recommendation that GAAP allow the option of “backwards tracing” as a long term solution. For more information, contact ABA’s Josh Stein.
