BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION
AND REGULATION

SR 18-2
January 18, 2018

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE

BANK AND TO FINANCIAL INSTITUTIONS SUPERVISED BY THE FEDERAL
RESERVE

SUBJECT: Interagency Statement on Accounting and Reporting Implications of

the New Tax Law

Applicability: This guidance applies to all Federal Reserve supervised financial institutions,
including those with $10 billion or less in consolidated assets, that file regulatory reports
prepared in accordance with generally accepted accounting principles (GAAP).

The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency (the agencies) issued the attached Interagency Statement on
Accounting and Reporting Implications of the New Tax Law to provide supervised institutions
with guidance on the accounting implications of the new tax law, which was enacted on
December 22, 2017 (the Act), 1 and certain related matters.

The accounting guidance in the interagency statement is based on the application of

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 740, “Income Taxes,” and does not represent new rules or regulations of the agencies.
ASC Topic 740 requires institutions to recognize the effect of changes in tax laws or rates in the
period in which the legislation is enacted. As the Act was enacted prior to December 31, 2017,
institutions would record the effects of the Act in their December 31, 2017 regulatory reports.
Changes in deferred tax assets (DTAs) and deferred tax liabilities (DTLs) resulting from the
Act’s lower corporate income tax rate and other applicable provisions of the Act, would be
reflected in an institution’s income tax expense in the period of enactment.

The statement notes that the agencies expect supervised institutions to use all available
information to make a good faith effort to reasonably estimate the effects of the Act when
preparing their December 31, 2017 regulatory reports. Institutions will be allowed to refine their
reasonable estimates as additional information is obtained and will not be required to amend
previously filed regulatory reports as these estimates are adjusted.

1
An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal
year 2018, P.L. 115-97 (originally introduced as the Tax Cuts and Jobs Act).
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 The statement also acknowledges that the Act may result in a decrease in capital and
after-tax earnings for institutions in a net DTA position as of and for the period ending
December 31, 2017. The agencies view the effect of remeasuring DTAs and DTLs due to the
Act as a nonrecurring event that generally will not have a substantial adverse impact on most
institutions’ core earnings or capital over the long term. Nevertheless, if an institution expects
the effects of the Act to lower its prompt corrective action category as of December 31, 2017, or
a subsequent quarter-end date, the institution should contact its primary federal regulator.

Reserve Banks are asked to distribute this letter to supervised institutions in their
districts, as well as to appropriate supervisory and examination staff. Questions regarding this
letter should be directed to Lara Lylozian, Assistant Chief Accountant, at (202) 475-6656 in the
Division of Supervision and Regulation. In addition, questions may be sent via the Board’s
public website. 2

Michael S. Gibson
Director

Attachment
• Interagency Statement on Accounting and Reporting Implications of the New Tax Law

2
See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
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 Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency

Interagency Statement on Accounting and Reporting Implications of

the New Tax Law

January 18, 2018

Purpose

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency (hereafter, the agencies) are
providing supervised institutions with guidance on the accounting implications of the new tax
law, which was enacted on December 22, 2017 (the Act), 1 and certain related matters.

The accounting guidance in this interagency statement is based on the application of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740,
“Income Taxes,” and does not represent new rules or regulations of the agencies. Changes as a
result of the Act are immediately relevant to December 31, 2017, financial statements and
regulatory reports, such as the Consolidated Reports of Condition and Income (Call Report) and
the Consolidated Financial Statements for Holding Companies (FR Y-9C Report). 2

Overview

ASC 740 requires that the effect of changes in tax laws or rates be recognized in the period in
which the legislation is enacted. 3 As the Act was enacted prior to December 31, 2017,
institutions would record the effects of the Act in their December 31, 2017, regulatory reports.
Changes in deferred tax assets (DTAs) and deferred tax liabilities (DTLs) resulting from the
Act’s lower corporate income tax rate and other applicable provisions of the Act would be
reflected in the institution’s income tax expense in the period of enactment. 4

Impact on Deferred Tax Assets and Liabilities

ASC 740 requires DTAs and DTLs to be measured at the enacted tax rates expected to apply
when these assets and liabilities are expected to be realized or settled. 5 As a result of the change

1
An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal
year 2018, P.L. 115-97 (originally introduced as the Tax Cuts and Jobs Act).
2
Holding companies should also report the effects of the Act in other relevant December 31, 2017, regulatory
reports filed with the Board of Governors of the Federal Reserve System.
3
See ASC 740-10-35-4.
4
See ASC 740-10-45-15.
5
See ASC 740-10-55-23.

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in the federal tax rate effective for tax years beginning on or after January 1, 2018, institutions
would remeasure their DTAs and DTLs for purposes of reporting as of December 31, 2017.
When remeasuring these accounts, institutions would apply the newly enacted federal tax rate to
those temporary differences expected to reverse in tax years beginning on or after January 1,
2018. A reduction in the federal tax rate alone would result in decreased DTAs (and a
corresponding increase in income tax expense) and decreased DTLs (and a corresponding
decrease in income tax expense). The effects of these changes are to be reported in Schedule RI,
Income Statement, item 9, “Applicable income taxes (on item 8),” in Call Reports and in
Schedule HI, Consolidated Income Statement, item 9, “Applicable income taxes (foreign and
domestic),” in FR Y-9C Reports filed as of December 31, 2017. Under ASC 740, institutions
that do not use a calendar year tax year may need to schedule reversals of temporary differences
at the various applicable enacted federal income tax rates to remeasure their DTAs and DTLs. 6

Valuation Allowance

Pursuant to ASC 740, a valuation allowance is recorded against any DTA for which it is more
likely than not that the benefit of the DTA will not be realized. 7 In conjunction with the
remeasurement of an institution’s DTAs, management should exercise judgment when assessing
the need for a valuation allowance. Any adjustment to an existing DTA, through the creation of
a new, or an adjustment to an existing, valuation allowance, is to be included in Schedule RI,
Income Statement, item 9, “Applicable income taxes (on item 8),” in the Call Report and in
Schedule HI, Consolidated Income Statement, item 9, “Applicable income taxes (foreign and
domestic),” in the FR Y-9C Report in the period the valuation allowance is established or
adjusted. Additional guidance is provided in the Glossary entry for “Income Taxes” in the
regulatory report instruction books.

Effect on Amounts Recognized in Accumulated Other Comprehensive Income

In accordance with ASC 740, the impact of the remeasurement of the deferred tax effects of
items reported in accumulated other comprehensive income (AOCI) is recorded through income
tax expense, not through other comprehensive income (OCI) (and, hence, AOCI). 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.

For example, assume an institution purchased a debt security in July 2017 for $1,000,000 and
designated the security as available for sale (AFS). As of September 30, 2017, the AFS debt
security had a fair value of $990,000. To record the decline in fair value as of September 30,
2017, the institution decreased the carrying value of the debt security on the balance sheet by
$10,000 and, assuming a 35 percent tax rate, recognized a DTA of $3,500 and a net decrease of
$6,500 ($10,000 decline in fair value, net of tax effect of $3,500) that flowed through OCI to
AOCI.

As a result of the Act, the institution’s tax rate changes from 35 percent to 21 percent effective
for tax years beginning on or after January 1, 2018. The fair value of the AFS debt security

6
See ASC 740-10-55-15(c).
7
See ASC 740-10-30-5(e) and 740-10-30-16 through 740-10-30-25.

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remains $990,000 as of December 31, 2017. Therefore, the institution would adjust the DTA
associated with the unrealized loss on its AFS debt security by reducing the DTA from $3,500 to
$2,100. While the entry to offset the establishment of the DTA as of September 30, 2017, was
recorded through OCI to AOCI, ASC 740 requires all effects of changes in tax laws and rates to
be recorded through current period income tax expense. 8 Thus, the $1,400 difference between
the $3,500 reported as a DTA before it is remeasured, and the $2,100 reported as a DTA after it
has been remeasured in accordance with ASC 740 as a result of the Act’s change in the tax rate,
is reported as income tax expense for the period ending December 31, 2017.

After recording the effect of the change in the tax rate, the amount associated with the unrealized
loss on the AFS debt security that is reflected in AOCI as of December 31, 2017, is unchanged at
$6,500. This results in a disparity between the tax effect of the unrealized loss on the AFS debt
security included in AOCI ($3,500) and the amount recorded as a DTA for the tax effect of this
unrealized loss ($2,100). While ASC 740 does not specify how this disproportionate tax effect
should be resolved, the FASB approved during its January 10, 2018, meeting issuing an
Exposure Draft of a proposed Accounting Standards Update (ASU) that will allow
reclassification of the disproportionate tax effect ($1,400 in this example) from AOCI to retained
earnings in financial statements that have not yet been issued. The FASB expects the ASU to be
finalized in February 2018. Therefore, to maintain consistency between amounts reported in
their financial statements and regulatory reports, institutions may incorporate the guidance
proposed in the ASU for the various items reported net of deferred tax effect in AOCI when
preparing their December 31, 2017, regulatory reports.

Regulatory Capital Effects

Under the agencies’ regulatory capital rules, DTAs arising from temporary differences that could
be realized through net operating loss (NOL) carrybacks as of the regulatory capital calculation
date are not subject to deduction from regulatory capital. 9 In contrast, temporary difference
DTAs that could not be realized through NOL carrybacks, i.e., those for which realization
depends on future taxable income as of the regulatory capital calculation date, are deducted from
common equity tier 1 (CET1) capital if they exceed certain CET1 capital deduction thresholds.

Consistent with the regulatory capital rules, for tax years beginning on or before December 31,
2017, an institution may consider its hypothetical NOL carryback potential when determining the
amount of temporary difference DTAs, if any, subject to the deduction thresholds for purposes of
calculating and reporting its regulatory capital. Thus, an institution’s NOL carryback potential

8
See ASC 740-10-45-15.
9
12 CFR 217.22(d)(1)(i) (Board of Governors of the Federal Reserve System); 12 CFR 324.22(d)(1)(i) (Federal
Deposit Insurance Corporation); 12 CFR 3.22(d)(1)(i) (Office of the Comptroller of the Currency).

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may be taken into account for regulatory capital purposes in its December 31, 2017, regulatory
reports. 10

However, for tax years beginning on or after January 1, 2018, the Act generally removes the
ability to use NOL carrybacks to recover taxes paid in prior tax years. As a result of this change
in tax law and its interaction with the agencies’ regulatory capital treatment of temporary
difference DTAs, when an institution calculates its regulatory capital in tax years beginning on
or after January 1, 2018, the realization of all temporary difference DTAs will be dependent on
future taxable income. Therefore, all temporary difference DTAs will be subject to the
deduction thresholds for regulatory capital purposes in such tax years.

Preparation of Regulatory Reports

Institutions are expected to use all available information to make a good faith effort to
reasonably estimate the effects of the Act when preparing their December 31, 2017, regulatory
reports. This is consistent with the Securities and Exchange Commission’s (SEC) Staff
Accounting Bulletin No. 118 (SAB 118), which was issued on December 22, 2017, and with the
FASB Staff Q&A on Whether Private Companies and Not-for-Profit Entities Can Apply SAB
118 (FASB Staff Q&A), which was issued on January 11, 2018. The agencies encourage all
institutions to review SAB 118 and the FASB Staff Q&A. Institutions may use the measurement
period approach described in those documents when preparing regulatory reports as of and for
the period ending December 31, 2017, and in subsequent periods. Thus, institutions will be
allowed to refine their reasonable estimates as additional information is obtained and will not be
required to amend previously filed regulatory reports as these estimates are adjusted. An
institution’s reasonable estimates may include some amounts that are provisional for up to one
year following the enactment date of the Act while the institution gathers necessary information
to prepare, analyze, and calculate the effects of the law. Depository institutions and holding
companies may disclose significant provisional amounts, information limitations, and
measurement period adjustments as of December 31, 2017, and in subsequent periods in
Schedule RI-E, Explanations, item 7, “Other explanations,” or in the Optional Narrative
Statement in the Call Report and in the Notes to the Income Statement-Other or in the Notes to
the Balance Sheet-Other in the FR Y-9C Report, respectively. SAB 118 includes suggestions for
appropriate disclosures in these regulatory report schedules when using a measurement period
approach to accounting for the changes in tax law.

Supervisory Considerations

The agencies understand the Act may result in a decrease in capital and after-tax earnings for
institutions in a net DTA position as of and for the period ending December 31, 2017. The
agencies view the effect of remeasuring DTAs and DTLs due to the Act as a nonrecurring event
that generally will not have a substantial adverse impact on most institutions’ core earnings or
capital over the long term. Nevertheless, if an institution expects the effects of the Act to lower

10
An institution with a tax year other than the calendar year may consider its hypothetical NOL carryback potential
when calculating and reporting its regulatory capital for regulatory report dates through the end of its last tax year
beginning on or before December 31, 2017. For example, an institution with a tax year beginning on July 1, 2017,
may consider its NOL carryback potential when calculating and reporting its regulatory capital for regulatory report
dates through June 30, 2018.

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its prompt corrective action category as of December 31, 2017, or a subsequent quarter-end date,
the institution should contact its primary federal regulator.

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