Tax Cuts and Jobs Act: Implications for financial institutions

Jan 18, 2018
Financial institutions Financial reporting

On January 18, 2018, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which would require entities to reclassify from accumulated other comprehensive income (AOCI) to retained earnings the effects of the change in the federal tax rate under the Tax Cuts and Jobs Act (TCJA) on deferred amounts that were originally recorded in other comprehensive income (OCI). The amount of the reclassification would exclude the effects of any valuation allowance previously charged to income from continuing operations. Comments on the proposed ASU are due February 2, 2018.

The guidance in the proposed ASU cannot be applied by an entity in its financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) until the FASB finalizes the guidance and issues a final ASU. While this will not happen before financial institutions are required to file their call reports at the end of January 2018, it is expected to happen before financial institutions issue their U.S. GAAP financial statements for the period ending December 31, 2017. Because there is a strong desire for consistency between the amounts included in a financial institution’s U.S. GAAP financial statements and its call report, also on January 18, 2018, the banking agencies issued interagency guidance, which allows financial institutions to make the reclassification from AOCI to retained earnings for the effects of the tax rate change on deferred amounts originally recorded in OCI for purposes of the financial information included in their call reports filed at the end of January 2018. In other words, the guidance allows financial institutions to apply the proposed ASU in the call reports they will file at the end of January 2018.

Refer to the interagency guidance for additional information about the reclassification financial institutions may make in the call reports they file at the end of January 2018. Refer to the proposed ASU for additional information about the FASB’s proposal.