FASB Takes Action on Deferred Tax Issue

By now, all C-Corp banks are aware of the adjustment to deferred taxes needed to address the impact of the Tax Cuts and Jobs Act. However, the adjustment to deferred taxes related to unrealized gains/losses on investment securities has revealed a burdensome flaw in current GAAP.  FASB to the rescue?

Under current GAAP, all deferred taxes must be adjusted upon enactment of new tax law through earnings (income tax expense) even if the deferred taxes in question were originally charged or credited directly to equity (accumulated other comprehensive income).  Accordingly, the remaining amounts left in accumulated other comprehensive income (AOCI) will bear no reasonable relationship to the appropriate tax rates for the corresponding unrealized gain/loss. 

Additionally, this difference will only be relieved when the particular investments are disposed of, requiring the burdensome task of tracking the investments.  A lot of work with confusing results.   

At the urging of numerous interested parties, including the ICBA and ABA, FASB took up this issue in their January 10, 2018 meeting.  They have tentatively decided to require a reclassification from AOCI to retained earnings for the stranded tax effects resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act.  This represents a one-time fix to this particular issue as FASB also decided to add a broader project to its research agenda that would allow “backwards tracing” in the future.  There is now a 15 day comment period on the matter and it appears FASB will issue this accounting change in final form early February, 2018.  It would be effective for fiscal years beginning after December 15, 2018 with early adoption permitted. 

To recap, this proposed fix would still require the effect of the tax rate change on deferred taxes related to unrealized gains/losses to be reflected in net income with an offsetting entry to retained earnings, resulting in a neutral impact on regulatory capital.

What should banks due with respect to this matter in preparing their December 31, 2017 Call Reports which are due January 30, 2018?  At the deadline for this article, it has been reliably reported that regulators will issue guidance on Wednesday January 17, 2018 allowing banks to  early adopt this fix in preparing their December 31, 2017 Call Reports. 

We urge you to consult with your FBLG account administrator to arrive at an appropriate course of action based on your particular facts and circumstances.