On January 18, 2018, the banking agencies including the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued an interagency statement for all OCC-supervised financial institutions on accounting and reporting implications of the new tax law and certain related matters. Changes required as a result of the new law, which was enacted on December 22, 2017, are relevant to December 31, 2017 financial statements and regulatory reports.
The Financial Accounting Standards Board Accounting Standards Codification Topic 740, “Income Taxes,” requires that the effect of changes in tax laws or rates be recognized in the period in which the legislation is enacted. As the new tax law was enacted before December 31, 2017, institutions must record the effects of the new tax law in their December 31, 2017 regulatory reports. This guidance does not represent new rules or regulations, but instead clarifies:
- That changes in deferred tax assets and deferred tax liabilities resulting from the lower corporate income tax rate, and other applicable provisions of the new tax law, should be reflected in an institution’s income tax expense in the period of enactment
- How to resolve the disproportionate tax effects in accumulated other comprehensive income as a result of the remeasurement of deferred tax assets and liabilities
- The impact of the new tax law on regulatory capital
- Under U.S. GAAP, the effect of changes in tax laws or rates is recognized in income tax expense in the period in which the legislation is enacted.
- For Call Report purposes as of December 31, 2017, an institution’s deferred tax assets (DTAs) and deferred tax liabilities (DTLs) are to be remeasured at the enacted tax rates expected to apply when these assets and liabilities are expected to be realized or settled.
- Because the impact of the remeasurement of the deferred tax effects of items reported in accumulated other comprehensive income (AOCI) is recorded through income tax expense, this creates a disproportionate tax effect in AOCI as the recorded DTA or DTL related to an item reported in AOCI no longer equals the tax effect included in AOCI for that item. On January 10, 2018, the Financial Accounting Standards Board (FASB) approved issuing a proposal to allow reclassification of this disproportionate tax effect from AOCI to retained earnings. Institutions may apply the FASB’s proposed reclassification guidance for Call Report purposes as of December 31, 2017.
- An institution may consider its net operating loss (NOL) carryback potential when determining the amount of temporary difference DTAs, if any, subject to the deduction thresholds in the regulatory capital rules for purposes of calculating and reporting its regulatory capital as of December 31, 2017 (and through the end of its last tax year beginning on or before that date).
- For tax years beginning on or after January 1, 2018, the new tax law generally removes the ability to use NOL carrybacks to recover taxes paid in prior tax years. As a result, all temporary difference DTAs will be subject to the deduction thresholds for regulatory capital purposes in such tax years.
Institutions are expected to use all available information to make a good faith effort to reasonably estimate the effects of the new tax law when preparing their December 31, 2017 and subsequent regulatory reports. Institutions may use the measurement period approach described in documents recently issued by the Securities and Exchange Commission and the FASB when preparing these regulatory reports.
More information on the interagency statement can be found at the following links.
Working with a team of industry-experienced advisors to provide insight and answers can be critically important for your financial institution. Please contact us with any questions on this guidance or other issues your institution is facing.