FDIC Letter on the Accounting and Reporting Implications of the New Tax Law

The FDIC recently issued a Financial Institution Letter (“Letter”) to provide guidance on certain accounting and reporting implications of the new tax law, which was enacted on December, 22, 2017.  The Letter highlights important changes relevant to the preparation of financial statements and regulatory reports for December 31, 2017.  The guidance applies to all FDIC-supervised banks and savings associations, including community institutions, with total assets under $1 billion.

Some highlights include:

• For Call Report purposes as of December 31, 2017, an institution’s deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) are to be re-measured 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 re-measurement 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 as of December 31, 2017.
• For tax years beginning on or after January 1, 2018, the new tax law generally removed 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 may use the measurement period approach described in documents recently issued by the Securities and Exchange Commission and the FASB when preparing their regulatory reports.