By James Redding, Senior Manager, Financial Audit
The recent tax law changes, which became law on December 22, 2017, will have a significant impact on future tax payments. In particular, banks need to assess the impact of the lowered marginal rates and reduced ability to apply Net Operating Loss ("NOL") carrybacks on their deferred tax balance sheet accounts (asset and liability). While the old rates still apply to current taxes (2017 and prior years), the new rates apply to future payments, and therefore to deferred tax items on banks' balance sheets.
The deferred tax asset and liability accounts reflect a cost or benefit in future years, when the new, lower rates will be in effect. Thus, deferred tax items will need to be written down to reflect the lower future tax rates and reduced ability to take NOL carrybacks. On January 4, 2018, the FDIC issued FIL 3-2018 which stated that, "Under U.S. generally accepted accounting principles, the effects of the recently enacted changes in tax laws and rates must be reflected in the fourth quarter 2017 Call Report."
On January 18, 2018, the regulators issued guidance on how these changes can be expected to impact call reports and regulatory capital. See the FDIC's FIL 6-2018 at:
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The tax changes will have an impact on regulatory capital (i.e., Schedule RC-R). The majority of banks will have an increase in net deferred tax liabilities and a reduction in net deferred tax assets. This will impact income, retained earnings, accumulated other comprehensive income ("AOCI"), as well as net deferred tax assets/liabilities. In addition to rate changes, NOL carrybacks will generally be eliminated in 2018 and after, which may also impact future capital calculated in RC-R.
Banks need to calculate the new valuations and record the revised valuations on their books. Banks should discuss the impacts with their tax accountants and/or external auditors, if they have not done so already. Additionally, banks should document the changes thoroughly to be able to demonstrate a good faith effort at compliance with the guidance. Again, these changes in the Balance Sheet will need to be reflected in banks' Call Reports as of December 31, 2017, which are due on January 30, 2018.
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