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New Tax Law Accounting Issues

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Today appears to be the day that the historic Tax Cuts and Jobs Act will get the final votes needed to pass and send to President Trump for enactment. The most significant provision in this Bill that will have a positive impact on Banks is the reduction in the corporate tax rate from 35% to 21%, effective for years beginning on or after January 1, 2018.

While the tax rate reduction will lower tax expense significantly in future years, the immediate accounting impact for nearly all Banks will cause a negative result for 2017. Under the current accounting standards, ASC 740, the effect of a change in tax law or tax rates is recognized at the enactment date, which in this case will most certainly be in 2017. This will require deferred tax assets and liabilities be recalculated and re-valued at the lower tax rate. Any adjustment needed to re-value the deferred tax assets and liabilities is recognized through income tax expense in the current period.

A second, more onerous impact, is the requirement under ASC 740 that requires the adjustment to deferred tax assets and liabilities for items now presented in Accumulated Other Comprehensive Income to also be reflected as a current adjustment to income tax expense. The deferred tax effect of items in AOCI has traditionally being reported through Other Comprehensive Income and not through earnings. It would seem that this impact of ASC 740 was unintentional when written, but this is the first time that there has been a tax rate reduction of this magnitude since the former FAS 109 was adopted.

Letters have been sent to FASB from ABA and Mass Bankers regarding this issue. All are hopeful that FASB acts quickly to correct this accounting treatment. We will continue to monitor any developments at FASB and keep you informed.

For your December 31, 2017 financial statements and Call Report, you will need to do the following:

  1. Deferred tax assets and liabilities will first need to be adjusted for any changes in timing differences that have occurred up to December 31st.
  2. The net deferred tax asset/liability then needs to be recalculated using the new lower federal tax rate, with an adjustment to the net deferred tax asset or liability recorded.
  3. Any deferred tax asset or liability on AOCI items needs to be first adjusted at the old rates to reflect the December 31st balance, then recalculated at the new rate to determine the adjustment that is recorded in current income tax expense.
  4. Assuming FASB provides new guidance, the adjustment for the change in deferred tax on the AOCI items would be reclassified back out of income tax expense and into AOCI.

As always, we at Marcum are available to assist you wherever possible through this process and answer any questions you may have.

RESOURCES
Letter from ABA to FASB
Letter from Mass Bankers to FASB

 
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David St. Yves, Partner, Assurance

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