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Reminder on Recent Changes to Marginal Tax Rates: Fourth Quarter 2017 Call Report Impact

Posted by Jim January 29, 2018 4:12pm

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By Jim Cole, Senior Manager, Financial Audit

The recent tax law changes,which became law on December 22, 2017, will have a significant impact on futuretax payments. In particular, banks need to assess the impact of the loweredmarginal 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 (2017and prior years), the new rates apply to future payments, and therefore todeferred tax items on banks' balance sheets.

The deferred tax assetand 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 writtendown to reflect the lower future tax rates and reduced ability to take NOLcarrybacks. On January 4, 2018, the FDIC issued FIL 3-2018 which statedthat, "Under U.S.generally accepted accounting principles, the effects of the recently enactedchanges in tax laws and rates must be reflected in the fourth quarter 2017 CallReport."

On January 18, 2018, theregulators issued guidance on how these changes can be expected to impact callreports and regulatory capital. See the FDIC's FIL 6-2018 at:

https://www.fdic.gov/news/news/financial/2018/fil18006.pdf

For additional details, click here or visit:

https://www.fdic.gov/news/news/financial/2018/fil18006a.pdf

The tax changes will have animpact on regulatory capital (i.e., Schedule RC-R). The majority of banks willhave an increase in net deferred tax liabilities and a reduction in netdeferred tax assets. This will impact income, retained earnings, accumulatedother comprehensive income ("AOCI"), as well as net deferred taxassets/liabilities. In addition to rate changes, NOL carrybacks will generallybe eliminated in 2018 and after, which may also impact future capitalcalculated in RC-R.

Banks need to calculate the new valuations and record the revisedvaluations on their books. Banks should discuss the impacts with their taxaccountants and/or external auditors, if they have not done so already.Additionally, banks should document the changes thoroughly to be able todemonstrate a good faith effort at compliance with the guidance. Again, these changes in the Balance Sheetwill need to be reflected in banks' Call Reports as of December 31, 2017, which aredue on January 30, 2018.