ABA Urges Banks to Plan for Tax Reform Impact on 2017 Earnings, Capital

December 14, 2017

As lawmakers near final agreement on tax reform, ABA is urging banks to plan for and communicate the impact the tax rate changes will have on current earnings and capital, while at the same time appealing to the Financial Accounting Standards Board to mitigate the potential disruption that will be caused by current accounting standards.

As noted in a preliminary analysis ABA posted last week, enactment of tax reform this year has important, immediate accounting and capital implications for banks, particularly those with deferred tax assets and liabilities. Under generally accepted accounting principles, if the tax law is signed before January 1, it will require the immediate reevaluation of DTAs and DTLs, with the difference recorded through net income. Since the new tax rates won’t be effective until later, this could impact banks’ current quarterly earnings statements and regulatory capital levels.

To help banks plan for and communicate these changes to their boards, management teams, auditors and others, ABA has posted a brief PowerPoint deck on the issues requiring attention. ABA also wrote to FASB Chairman Russ Golden recommending a change in current standards to allow companies to recognize the effects of lower tax rates on DTAs and DTLs relating to items within accumulated other comprehensive income.

“There is a high level of detail needed to track the timing of recognition of specific DTAs and DTLs (whether in AOCI or not) caused by the change in income tax rates. Such work should not then result in confusion for investors,” ABA wrote. “Therefore, we strongly urge you to make an immediate technical correction to mitigate this important issue.”

Download the presentation.
Read ABA's preliminary analysis.
Read ABA's letter to FASB.