[Federal Register Volume 60, Number 28 (Friday, February 10, 1995)]
[Rules and Regulations]
[Pages 7903-7908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3364]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 95-02]
RIN 1557-AB14
Capital Adequacy: Deferred Tax Assets
AGENCIES: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
amending its capital adequacy rules with respect to deferred tax
assets. This final rule limits the amount of certain deferred tax
assets that a bank may include in Tier 1 capital for risk-based capital
and leverage capital purposes.
The OCC, in consultation with the Board of Governors of the Federal
Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC),
and the Office of the Thrift Supervision (OTS) (banking agencies),
developed this final rule in response to the Financial Accounting
Standards Board's (FASB) issuance of Statement of Financial Accounting
Standards No. 109, ``Accounting for Income Taxes'' (FAS 109), in
February 1992. The banking agencies adopted the provisions of FAS 109
for reporting in quarterly Consolidated Reports of Condition and Income
(Call Reports) beginning January 1, 1993. This reporting change
increased the amount of net deferred tax assets that a bank may record
on its balance sheet. This final rule will ensure that national banks
do not place excessive reliance on deferred tax assets to satisfy the
minimum capital adequacy requirements.
EFFECTIVE DATE: April 1, 1995.
FOR FURTHER INFORMATION CONTACT: Thomas G. Rees, Professional
Accounting Fellow, Office of the Chief National Bank Examiner, (202)
874-5180; Eugene W. Green, Deputy Chief Accountant, Office of the Chief
National Bank Examiner, (202) 874-5180; Roger Tufts, Senior Economic
Advisor, Office of the Chief National Bank Examiner, (202) 874-5070;
Ronald Shimabukuro, Senior Attorney, Legislative and Regulatory
Activities Division, (202) 874-5090, Office of the Comptroller of the
Currency, Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
In February 1992, the FASB issued FAS 109. FAS 109 provides
guidance on how to account for income taxes, including deferred tax
assets, and was effective for fiscal years beginning on or after
December 15, 1992. FAS 109 generally allows a bank to report certain
deferred tax assets it could not previously recognize, which has the
effect of increasing bank capital levels. Consequently, the OCC and the
other banking agencies were concerned about the impact of the change on
the financial institutions they regulate, especially regarding their
reported capital levels.
FAS 109--Deferred tax assets are assets that reflect, for financial
reporting purposes, the benefits of certain aspects of tax laws and
rules. Under FAS 109, a bank reports deferred tax assets that arise
from: (1) Tax carryforwards, and (2) deductible temporary differences.
Tax carryforwards are deductions or credits that a bank cannot use for
current tax purposes, but may carry forward to reduce taxable income or
income taxes payable in a future period [[Page 7904]] or periods. For
example, when a bank's tax deductions exceed its tax revenues, the
result is a net operating loss. Such losses may be used to recover
taxes paid in prior years (the carryback period) or may be carried
forward to reduce a bank's taxable income in a future period. The
situation is similar for some tax credits that a bank cannot use in the
current tax period. The bank will realize the benefit of deferred tax
assets arising from tax carryforwards if it generates sufficient
taxable income in the permissible carryforward period.
Temporary differences arise when a bank records financial events or
transactions in one period on the bank's books and recognizes them in
another period, or periods, on its tax return. There are two types of
temporary differences--deductible and taxable. Deductible temporary
differences reduce a bank's future taxable income. When a bank records
an addition to its allowance for loan and lease losses, it records that
amount as an expense on its books. However, the bank may be unable to
take the tax deductions for such losses until it charges off the loans
and realizes the losses. The chargeoffs typically occur in subsequent
periods. Thus, a bank creates a deferred tax asset when it adds an
amount to the allowance on the books, but charges it off in a future
period.
Taxable temporary differences produce additional taxable income in
future periods. For example, a bank may depreciate its bank building
using an accelerated depreciation method on its tax return but may use
a straight-line method when recording depreciation on its books. As a
result, the bank's tax depreciation will be less than its book
depreciation in certain future periods. This taxable temporary
difference will cause the bank to have higher taxable income in those
future periods.
A bank may only realize deferred tax assets arising from deductible
temporary differences by: (1) Recovering taxes paid in prior years, (2)
offsetting taxable temporary differences, or (3) earning sufficient
future taxable income. Consequently, if deferred tax assets arise from
deductible temporary differences and exceed the amount of recoverable
taxes paid in prior years plus offsetting taxable temporary
differences, the bank will only realize such deferred tax assets if it
generates sufficient taxable income in the carryforward period.
Hereafter, these deferred tax assets, and deferred tax assets arising
from tax carryforwards, will be called ``deferred tax assets that are
dependent upon future taxable income.''
FAS 109 allows a bank to record deferred tax assets that are
dependent upon future taxable income. However, the bank must establish
a reserve to adjust the recorded deferred tax asset to the amount that
it is more likely than not (i.e., likelihood of more than 50 percent)
to realize. A bank assesses the probability of realization based on its
prospects of earning taxable income in the future. The statutory
carryforward period of 15 years provides a limit on the amount of the
assessment.
Supervisory Concerns Regarding Deferred Tax Assets
Before adoption of FAS 109, regulatory policy generally limited the
recognition of net deferred tax assets to the bank's potential tax
carryback amount. In other words, a bank could only record an asset to
the extent it potentially could file for a tax refund if all book and
tax timing differences reversed at the report date.
Because FAS 109 allows a bank to record a greater amount of
deferred tax assets than under previous policy, the OCC and the other
banking agencies were concerned about the effect of the accounting
standard on bank capital adequacy. Specifically, the OCC was concerned
that FAS 109 would allow banks to include excessive amounts of deferred
tax assets that are dependent upon future taxable income as part of
regulatory capital.
Whether a bank can realize such assets depends on whether it
generates enough taxable income during the carryforward period. As new
products evolve and market conditions change, a bank's current
financial condition and outlook for future income can change rapidly.
Such changes make predicting future taxable income more difficult. For
many banks, including sound and well-managed banks, the judgment about
the likelihood that the bank will realize deferred tax assets that are
dependent upon future taxable income is highly subjective. Inaccurate
estimates could cause a bank to overstate its deferred tax assets and
its capital position. Therefore, allowing banks to recognize
significant amounts of assets based on subjective estimates could pose
a risk to the deposit insurance funds.
Additionally, the OCC is concerned about the effect of these
changes on a bank that is experiencing financial difficulty. Such banks
often have net operating loss carryforwards. As a result, these
troubled institutions potentially could record deferred tax assets
under FAS 109, even though their realistic prospects for generating
sufficient future taxable income are uncertain. As a troubled bank's
condition deteriorates, it is less likely to realize the financial
benefit of deferred tax assets that are dependent upon future taxable
income. In such instances, FAS 109 generally requires the bank to
reduce its recorded net deferred tax asset by increasing the asset's
valuation allowance. The result is a charge to earnings that will
reduce the bank's regulatory capital at precisely the time it needs
capital the most.
To address these concerns, on August 3, 1992, under the auspices of
the Federal Financial Institutions Examination Council (FFIEC), the
OCC, along with the other banking agencies requested public comment (57
FR 34135) on alternative approaches for the regulatory capital and
reporting treatment of deferred tax assets. Based on the comments
received, the FFIEC agreed to adopt FAS 109 for regulatory reporting
effective January 1, 1993.
After discussing the comments and suggestions received, the OCC and
the other banking agencies remained concerned about the impact of
deferred tax assets that are dependent upon future taxable income on
regulatory capital. The OCC believes that many financially sound banks
will have net deferred tax assets arising from deductible temporary
differences that exceed their taxable temporary differences and the
bank's carryback potential. Since many of these deferred tax assets
will be realized, the OCC agreed that banks should recognize some
amount of these assets in regulatory capital. The OCC and the other
banking agencies concluded they could adequately address their
supervisory concerns by placing a limit on the amount of such assets
that a bank could include in regulatory capital. This approach
maintained consistency between generally accepted accounting principles
(GAAP) and regulatory reporting.
Proposed Rule--In December 1993, the OCC issued a proposed rule to
amend its capital adequacy rules with respect to deferred tax assets
(58 FR 68065, December 23, 1993). The FRB (58 FR 8007, February 11,
1993), and the FDIC ( 58 FR 26701, May 5, 1993) published similar
proposed rules.
The OCC proposed to limit the amount of deferred tax assets that
are dependent upon future taxable income that a bank may include in
regulatory capital to the lesser of:
(1) The amount of deferred tax assets expected to be realized
within one year of the quarter-end report date, based on a bank's
projection of future taxable income (exclusive of tax carryforwards and
reversals of existing temporary differences) for that year, including
the effect of tax-planning strategies [[Page 7905]] expected to be
implemented during that year, or
(2) 10 percent of Tier 1 capital net of goodwill and other
disallowed intangible assets.
Banks have been calculating and reporting the amount of ``Deferred
tax assets disallowed for regulatory capital purposes'' in the Call
Reports since March 31, 1993.
Comments Received on the Proposed Rule--The comment period for the
OCC's proposed rule closed on January 24, 1994. The OCC received a
total of 17 comments on the proposed rule. The commenters consisted of
13 banks, three trade groups, and one public accounting firm.
All but one commenter expressed opposition to some portion or all
of the proposed rule. Eleven of the commenters indicated that a limit
on the amount of deferred tax assets included in regulatory capital was
unnecessary. However, six commenters agreed that some form of limit on
deferred tax assets was appropriate.
The primary concern of the commenters is that the adoption of a
deferred tax limit could increase regulatory burden because regulatory
capital policy would be more restrictive than GAAP. Several commenters
indicated that no limit on deferred tax assets is necessary because FAS
109 only permits the reporting of deferred tax assets that have a
better than 50% probability of being realized. Other commenters
indicated that the proposed one year limit was too restrictive because
there is a 15-year carryforward period in which a bank could realize
the deferred tax assets.
After carefully considering the comments, the OCC believes that a
limit on deferred tax assets is necessary. Estimates of future taxable
income are very subjective. If a bank does not realize these estimates,
the bank insurance fund is exposed to losses because bank capital would
be overstated. Moreover, unlike certain types of intangible assets that
a bank can include in regulatory capital at a higher allowable
percentage, a bank cannot sell deferred tax assets.
The GAAP standard allows a bank to record deferred tax assets that
they may not realize for up to 15 years. The OCC believes that allowing
deferred tax assets to constitute a significant portion of a bank's
capital is inappropriate, since deferred tax assets may have only a
slightly better than 50% possibility of realization. Furthermore, other
than the likelihood of realization, there is no specific limit under
GAAP on the amount of deferred tax assets that a bank can record.
Without a limit on deferred tax assets, a bank could include
significant amounts of deferred tax assets in capital.
In addition, the OCC believes that GAAP should guide rather than
establish regulatory capital policy. When formulating GAAP, the
accounting policy makers do not consider the safety and soundness
objectives of the capital standards applicable to banks. Therefore,
differences between the GAAP and regulatory capital definitions are
justified.
Final Rule
The OCC believes that since banks can only realize deferred tax
assets that are dependent upon future taxable income when they achieve
positive taxable earnings, a limit based on estimated future earnings
is rational. In general, a bank's projections up to 12 months into the
future are reliable. However, the OCC believes the reliability of such
projections decreases significantly for periods further in the future.
Therefore, having a one year cutoff reduces the risk of a bank
misstating its deferred tax assets because its estimate of future
income is inaccurate. Furthermore, the one year cutoff increases the
likelihood of a bank achieving the earnings required to realize the
recorded deferred tax asset.
The OCC believes that this final rule will ensure that such
deferred tax assets do not make up an unduly large portion of a bank's
regulatory capital base. The upper limit of 10 percent of Tier 1
capital provides a ``backstop'' that addresses this concern. This
requirement also reduces the risk that an overly optimistic estimate of
future taxable income will cause the bank to significantly misstate the
deferred tax asset.
The OCC believes that the combination of the one year future income
approach and the 10% of Tier 1 capital approach will provide an
effective and efficient limit on deferred tax assets. Consequently,
under the final rule, the amount of deferred tax assets that are
dependent upon future taxable income that a bank may include in its
regulatory capital is limited to the lesser of:
(1) The amount of deferred tax assets the institution expects to
realize within one year of the quarter-end report date, based on its
projection of future taxable income (exclusive of tax carryforwards and
reversal of existing temporary differences for that year), or
(2) 10 percent of Tier 1 capital, net of goodwill and all
identifiable intangible assets other than purchased mortgage servicing
rights and purchased credit card relationships, and before any
disallowed deferred tax assets are deducted.
Banks should note that under this final rule there is no limit on
deferred tax assets that a bank can realize from taxes paid in prior
carryback years and from reversals of existing taxable temporary
differences. In addition, to determine the limit on deferred tax
assets, a bank should assume that all temporary differences fully
reverse as of the report date. Also, estimates of future taxable income
should include the effect of tax planning strategies the bank is
planning to implement within one year of the quarter-end report date to
realize net operating loss or tax credit carryforwards that will
otherwise expire during the year. With respect to the Call Reports,
banks will continue to report deferred tax assets according to GAAP.
The OCC believes that the limit on deferred tax assets will pose
little or no additional burden on banks. Banks already follow FAS 109
for Call Report purposes and already are making projections of taxable
income. Additionally, the OCC has revised the 10 percent Tier 1 capital
calculation to be more straightforward and less burdensome. Under the
proposed rule, the 10 percent of Tier 1 capital calculation is based on
Tier 1 capital net of goodwill and other disallowed intangible assets.
As proposed, the 10 percent of Tier 1 capital calculation would have
required banks to first determine the amount of disallowed intangible
assets. After consideration of this matter, the OCC believes that this
additional computation is not necessary. Consequently, the final rule
requires that the 10 percent of Tier 1 capital calculation be based on
Tier 1 capital net of goodwill and all identifiable intangible assets
other than purchased mortgage servicing rights and purchased credit
card relationships, and before any disallowed deferred tax assets are
deducted. While this calculation may result in a slightly higher Tier 1
capital base, the OCC believes that this calculation is simpler and
imposes less burden on banks.
In response to the comments received, the OCC has decided to
incorporate the following additional provisions to reduce the
regulatory burden of this final rule.
Method of Estimating Future Income--In Banking Bulletin 93-15,
Supplement 1 (BB 93-15), the OCC specified a method of estimating
future taxable income. BB 93-15 provided a specific method for treating
originating and reversing tax timing differences in the calculation of
one year's future taxable income. Several commenters
[[Page 7906]] stated that other less restrictive methods of estimating
future taxable income, which are acceptable under GAAP, should also be
allowed.
After considering these comments, the OCC concluded that banks may
calculate one year's future taxable income based on either the specific
method in BB 93-15 or another reasonable method that is consistent with
GAAP. Since banks routinely make their own projections of future
taxable income and have this information readily available, this
modification reduces regulatory burden.
Gross-up of Intangibles--FAS 109 requires a bank to record higher
amounts of intangible assets acquired in nontaxable purchase business
combinations than they would record under previous GAAP for the same
transaction. The OCC capital adequacy rules require banks to deduct
certain intangible assets from regulatory capital. Consequently, under
FAS 109, a bank acquiring such assets would reflect a lower amount of
regulatory capital after deducting these disallowed intangibles than it
would have under previous accounting standards even though there is no
additional risk to capital.
Several commenters indicated that the OCC should not require banks
to deduct the additional amounts of identifiable intangible assets
required by FAS 109. The OCC agrees with these commenters. Since the
higher intangible amounts occur simply because of an accounting rule
change, the higher amounts do not present additional risk to capital.
Therefore, because the increased value of the intangible assets pose no
additional risk to capital adequacy, this final rule permits a bank to
net the deferred tax liability associated with a disallowed intangible
asset against that intangible asset in the calculation of its limit on
deferred tax assets.
Under this approach, a bank would only deduct the net amount of the
disallowed intangible from Tier 1 capital. Netting is not allowed
against purchased mortgage servicing rights and purchased credit card
receivables since a bank deducts these assets for capital adequacy
purposes only if they exceed specified limits on intangible assets.
Consequently, this final rule results in the same treatment for
intangibles resulting from purchase business combinations as under
previous GAAP. However, to ensure this benefit is not double counted, a
deferred tax liability netted in this manner could not also be netted
against deferred tax assets when determining the amount of deferred tax
assets that are dependent upon future taxable income.
Leveraged Leases--Similar to the ``gross up of intangibles'' issue,
the OCC agrees with one commenter who recommended that the final rule
include a specific provision relating to the accounting treatment for
leveraged leases. The commenter noted the valuation of a leveraged
lease acquired in a purchase business combination gives recognition to
the estimated future tax effect of the remaining cash flows of the
lease. Therefore, any future tax liabilities related to acquired
leveraged leases are included in the valuation of the leveraged leases
and are not shown on the balance sheet as deferred taxes payable. This
artificially increases the amount of deferred tax assets for
institutions that acquire a leveraged lease portfolio. The commenter
suggested that banks treat the future taxes payable included in the
valuation of a leverage lease portfolio as a reversing taxable
temporary difference available to support the recognition of deferred
tax assets.
Although this situation will not affect many banks, the OCC agrees
with this commenter. Accordingly, when applying the limit on deferred
tax assets, a bank may use the deferred tax liabilities embedded in the
carrying value of a leveraged lease to reduce the amount of deferred
tax assets subject to the limit.
Tax Jurisdictions--In a response to the proposed rule, a commenter
suggested that a bank calculate one overall limit on deferred tax
assets to cover all tax jurisdictions in which the bank operates. This
provision would reduce burden on large banks that operate in numerous
jurisdictions because they would not need to separately calculate a
limit on deferred tax assets for each jurisdiction. FAS 109 already
requires a jurisdiction-by-jurisdiction approach. The OCC agrees with
the commenter that the separate tax jurisdiction requirement in the
overall limit on deferred tax assets is unnecessary. Therefore, to
reduce regulatory burden, a bank may calculate one overall limit on
deferred tax assets that covers all tax jurisdictions in which the bank
operates.
Timing--A bank may use the future taxable income projections for
its closest fiscal year (adjusted for any significant changes that have
occurred or are expected to occur) when applying the limit on deferred
tax assets at a report date other than year-end. Therefore, a bank will
not have to prepare a new projection each quarter. Several commenters
requested this treatment because it reduces the frequency that a bank
is required to revise their estimate of future taxable income.
Except for these provisions, banks should follow FAS 109 in
determining regulatory capital. Net deferred tax assets included in
bank Call Reports under FAS 109, that exceed the limit on deferred tax
assets, should be deducted from Tier 1 capital. Banks should also
deduct the amount of disallowed deferred tax assets from both total
assets and from risk-weighted assets in determining their leverage
capital and risk-based capital ratios. Deferred tax assets included in
risk-based capital continue to have a risk weight of 100%.
Other Considerations
Separate Entity Method--Consistent with the policy of applying GAAP
individually to banks of a holding company, each subsidiary bank must
determine its limit on deferred tax assets separately from the holding
company. Under this ``separate entity method,'' a subsidiary of a
holding company is treated as a separate taxpayer, and its tax
provision is calculated on this basis.
In some cases, a bank's holding company may not have the financial
capability to reimburse the bank for tax benefits derived from the
bank's carryback of net operating losses or tax credits. In these
cases, the amount of carryback potential the bank may consider in
calculating the limit on deferred tax assets is limited to the amount
which it could reasonably expect to have refunded by its parent.
Several commenters suggested that the OCC eliminate the separate
entity approach because GAAP does not require it and because the
approach ignores Federal tax law and binding intercompany tax
settlement agreements. The OCC considered these comments. However, the
banking agencies generally require banks to file regulatory reports
using a separate entity approach, and consistency between the reports
would be reduced if the OCC permitted a bank to use other methods for
calculating deferred tax assets. Therefore, the OCC decided that banks
must continue to report and calculate the limit on deferred tax assets
under the separate entity method.
Tax Effects of Financial Accounting Standard 115 (FAS 115)--The
OCC, along with the other banking agencies, adopted Statement of
Financial Accounting Standards No. 115, ``Accounting for Certain
Investments in Debt and Equity Securities'' (FAS 115), for regulatory
reporting purposes effective January 1, 1994. FAS 115 requires net
unrealized holding gains and losses on available-for-sale securities to
be recorded net of taxes. Consequently, when a bank recognizes
[[Page 7907]] the FAS 115 unrealized holding gains and losses on
available-for-sale securities in financial reports, it also must
include any deferred tax effects of these unrealized gains and losses
in its determination of the deferred tax asset.
For example, if a bank has an unrealized gain in the available-for-
sale portfolio, it must record a deferred tax liability for the taxes
that would be due if they sold the assets and realized the gain. On the
other hand, if a bank has an unrealized loss in the available-for-sale
portfolio, the bank should include the tax benefits from realizing that
loss when it records its deferred tax asset.
The OCC and the other banking agencies recently agreed that banks
should exclude the net unrealized holding gains and losses on
available-for-sale debt securities from regulatory capital
calculations. Therefore, it would be consistent to exclude the deferred
tax assets and liabilities relating to the FAS 115 gains and losses on
available-for-sale debt securities in the calculation of the allowable
amount of deferred tax assets for regulatory capital.
It has been argued that failure to eliminate these FAS 115 deferred
tax effects would cause a bank to overstate or understate the amount of
deferred tax assets disallowed for regulatory capital purposes. For
example, a bank with a net unrealized loss in its available-for-sale
account would report a related deferred tax asset in its Call Report.
If the bank does not remove the deferred tax asset relating to the net
unrealized loss, and has net deferred tax assets that exceed the
allowable amount stipulated in this final rule, the bank will overstate
the amount of deferred tax assets that it must deduct from regulatory
capital. Conversely, if the bank has a net unrealized gain on
available-for-sale securities, and does not remove its deferred tax
effect, the calculation of the limit on deferred tax assets will
understate the amount of deferred tax assets the bank must deduct from
regulatory capital.
The OCC believes that identifying and removing the deferred tax
components that specifically relate to FAS 115 may be very complicated,
and in some situations may place significant burden on banks.
Therefore, the OCC has decided to allow, but not require, banks to
eliminate the FAS 115 deferred tax items before calculating the limit
on deferred tax assets. Consequently, a bank that does not want to deal
with the complexity of the adjustment can reduce its implementation
burden. On the other hand, a bank that wants to achieve greater
precision may make such adjustments. Whether or not a bank chooses to
adjust for the FAS 115 deferred tax effects, it must apply that
approach consistently in future calculations of the limit on deferred
tax assets.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, it is
hereby certified that this regulation will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required. When considered with
the change in the reporting of deferred tax assets in the Call Report,
this final rule permits banks to include more deferred tax assets in
regulatory capital than under previous policy. However, this change
will not significantly impact banks of any size.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
List of Subjects in 12 CFR Part 3
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, part 3 of title 12,
chapter I, of the Code of Federal Regulations is amended as set forth
below.
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note,
3907, and 3909.
2. Paragraph (a) of Sec. 3.2 is revised to read as follows:
Sec. 3.2 Definitions.
* * * * *
(a) Adjusted total assets means the average total assets figure
required to be computed for and stated in a bank's most recent
quarterly Consolidated Report of Condition and Income (Call Report)
minus end-of-quarter intangible assets and deferred tax assets that are
deducted from Tier 1 capital. The OCC reserves the right to require a
bank to compute and maintain its capital ratios on the basis of actual,
rather than average, total assets when necessary to carry out the
purposes of this part.
* * * * *
3. In appendix A to part 3, section 1, paragraphs (c)(9) through
(c)(29) are redesignated as paragraphs (c)(10) through (c)(30) and a
new paragraph (c)(9) is added to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions.
* * * * *
(c) * * *
(9) Deferred tax assets means the tax consequences attributable
to tax carryforwards and deductible temporary differences. Tax
carryforwards are deductions or credits that cannot be used for tax
purposes during the current period, but can be carried forward to
reduce taxable income or taxes payable in a future period or
periods. Temporary differences are financial events or transactions
that are recognized in one period for financial statement purposes,
but are recognized in another period or periods for income tax
purposes. Deductible temporary differences are temporary differences
that result in a reduction of taxable income in a future period or
periods.
* * * * *
4. In appendix A to part 3, section 2, paragraph (c)(1) is
revised, a new paragraph heading is added to paragraph (c)(2),
paragraph (c)(3) is redesignated as paragraph (c)(4) and a heading
is added to newly designated paragraph (c)(4) and the introductory
text is revised, and a new paragraph (c)(3) is added, to read as
follows:
* * * * *
Section 2. Components of Capital.
* * * * *
(c) * * *
(1) Deductions from Tier 1 capital. The following items are
deducted from Tier 1 capital before the Tier 2 portion of the
calculation is made:
(i) All goodwill subject to the transition rules contained in
section 4(a)(1)(ii) of this appendix A;
(ii) Other intangible assets, except as provided in section
2(c)(2) of this appendix A; and
(iii) Deferred tax assets, except as provided in section 2(c)(3)
of this appendix A, that are dependent upon future taxable income,
which exceed thelesser of either:
(A) The amount of deferred tax assets that the bank could
reasonably expect to realize within one year of the quarter-end call
report, based on its estimate of future taxable income for that
year; or
(B) 10% of Tier 1 capital, net of goodwill and all intangible
assets other than purchased mortgage servicing rights and purchased
credit card relationships, and before any disallowed deferred tax
assets are deducted.
(2) Qualifying intangible assets. * * *
(3) Deferred tax assets--(i) Net unrealized gains and losses on
available-for-sale securities. Before calculating the amount of
deferred tax assets subject to the limit in section 2(c)(1)(iii) of
this appendix A, a bank may eliminate the deferred tax effects of
any net unrealized holding gains and losses on available-for-sale
debt securities. Banks report these net unrealized holding gains and
losses in their Call Reports as a separate component of equity
capital, but exclude them from the definition of common
stockholders' equity for regulatory capital [[Page 7908]] purposes.
A bank that adopts a policy to deduct these amounts must apply that
approach consistently in all future calculations of the amount of
disallowed deferred tax assets under section 2(c)(1)(iii) of this
appendix A.
(ii) Consolidated groups. The amount of deferred tax assets that
a bank can realize from taxes paid in prior carryback years and from
reversals of existing taxable temporary differences generally would
not be deducted from capital. However, for a bank that is a member
of a consolidated group (for tax purposes), the amount of carryback
potential a bank may consider in calculating the limit on deferred
tax assets under section 2(c)(1)(iii) of this appendix A, may not
exceed the amount that the bank could reasonably expect to have
refunded by its parent holding company.
(iii) Nontaxable Purchase Business Combination. In calculating
the amount of net deferred tax assets under section 2(c)(1)(iii) of
this appendix A, a deferred tax liability that is specifically
associated with an intangible asset (other than purchased mortgage
servicing rights and purchased credit card relationships) due to a
nontaxable purchase business combination may be netted against that
intangible asset. Only the net amount of the intangible asset must
be deducted from Tier 1 capital. Deferred tax liabilities netted in
this manner cannot also be netted against deferred tax assets when
determining the amount of net deferred tax assets that are dependent
upon future taxable income.
(iv) Estimated future taxable income. Estimated future taxable
income does not include net operating loss carryforwards to be used
during that year or the amount of existing temporary differences
expected to reverse within the year. A bank may use future taxable
income projections for their closest fiscal year, provided it
adjusts the projections for any significant changes that occur or
that it expects to occur. Such projections must include the
estimated effect of tax planning strategies that the bank expects to
implement to realize net operating losses or tax credit
carryforwards that will otherwise expire during the year.
(4) Deductions from total capital. The following items are
deducted from total capital:
* * * * *
Dated: February 3, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-3364 Filed 2-9-95; 8:45 am]
BILLING CODE 4810-33-P
