Guidance for the new tax law concerning accounting and reporting implications was distributed Thursday by federal banking agencies to give banks and savings associations insights about how the new law will affect their financial statements and regulatory reports.
In Financial Institution Letter (FIL) FIL-6-2018, the Federal Deposit Insurance Corp. (FDIC) stated that, under generally accepted accounting principles (GAAP), the impact of change in tax laws or rates is recognized in income tax expense in the same period in which the law is enacted.
For call report purposes, the agency letter said (as of year-end 2017), an institution’s deferred tax assets (DTAs) and liabilities (DTLs) are to be remeasured at the enacted tax rates expected to apply when those 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,” the letter states.
It notes that on Jan. 10, the Financial Accounting Standards Board (FASB) approved issuing a proposal to allow reclassification of this disproportionate tax effect from AOCI to retained earnings. The letter noted that institutions may apply the FASB’s proposed reclassification guidance for Call Report purposes as of Dec. 31, 2017.
The letter also points out:
- 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 Dec. 31, 2017 (and through the end of its last tax year beginning on or before that date).
- For tax years beginning on or after Jan. 1, 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 Dec. 31, 2017, and subsequent regulatory reports,” the letter states. “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.”
In its first FIL of the year (issued Jan. 3), the FDIC noted that completed fourth quarter call reports are — with few exceptions — due back to the FDIC by Jan. 30. “No extensions of time for submitting Call Report data are granted,” the letter states.
FDIC FIL-6-2018; New Tax Law: Accounting and Reporting Implications
SEC Staff Accounting Bulletin No. 118
FASB staff Q&A on whether private companies and not-for-profit entities can apply SAB 118