State bankers’ associations from every U.S. state are urging the Financial Accounting Standards Board (FASB) to adjust regulatory capital balances that were impacted by the new tax reform law.
The state associations, along with the American Bankers Association, are requesting that the approve a proposal to make the adjustment immediately so companies may apply the new standard to their 2017 reporting results.
The reduction of deferred tax assets and liabilities are recorded entirely within net income under current tax accounting that went into effect after the approval of the Tax Cut and Jobs Act in December.
Consequently, this distorts net income and regulatory capital and creates onerous operational burdens to track the related amounts in the future.
The FASB proposal will not change the impact to net income, however, the proposed adjustment between accumulated other comprehensive income (AOCI) and retained earnings will enable ending regulatory capital to be appropriately stated. This adjustment will also avoid operational requirements to track of the amounts that would have been “stranded” within AOCI.
In a letter to the FASB, the bankers’ associations noted that the reclassification of the stranded tax effects from AOCI to retained earnings is “a good operational solution.” They also supported a recommendation made by the ABA that generally accepted accounting principles allow the option of “backwards tracing” as a solution.