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Accounting Rule Change to Eliminate Inadvertent Hit to Earnings of Banks, Insurers

01.16.2018

An accounting rule change will eliminate an unintentional hit to earnings for banks, insurers and others. The hit was due to applying income tax accounting to the corporate tax reduction rate under the passed tax reform bill, the Tax Cuts and Jobs Act (TCJA). 

The TCJA lowers the corporate tax rate to 21 percent from 35 percent. Current income tax accounting rules require the adjustment of deferred taxes caused by the corporate tax rate reduction to be included in income from continuing operations, even if the deferred taxes were originally charged directly to other comprehensive income. Therefore, the tax effects of items in other comprehensive income don't reflect the appropriate tax rates.

Banking trade groups, banks and insurance trade organizations raised concerns to the Financial Accounting Standards Board (FASB) about the impacts of current requirements when combined with the corporate rate change. The concerned organizations thought that the accounting impacts would be alarming to companies in their sector because it would result in misleading balances in financial statements and cause confusion to stakeholders, investors and analysts.

On January 10, FASB voted to propose quick changes to the standard on reporting comprehensive income. All companies will be able to reclassify the effects of the tax rate change pertaining to items in accumulated other comprehensive income to retained earnings. The changes would amend the accidental consequences of applying the rules.

Companies have until January 25 to comment on the FASB decision. Changes would be effective for fiscal years after December 15, 2018, and interim periods within that period. Earlier application would also be allowed. 

Other governing and regulatory agencies are providing additional guidance related to the new tax law and corresponding changes. On January 18, the Office of the Comptroller of Currency (OCC), the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued an "Interagency Statement on Accounting and Reporting Implications of the New Tax Law" for supervised financial institutions.

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