The Federal Financial Institutions Examination Council has decided to follow generally accepted accounting principles in booking deferred tax assets in call reports and permit them to account for up to 10% of Tier 1 capital. The move especially benefits institutions with large loan loss reserves, a substantial portion of which are due to losses in real estate lending.

Specifically, the FFIEC ruling will allow deferred tax assets to be counted as part of Tier 1 capital up to the lesser of 10 % of Tier 1 capital or of one year of projected earnings.

"This will be particularly helpful to large, well capitalized institutions but less so to smaller ones," said Jack Wilson, national director of Ernest & Young's Financial Services Industry Tax Service.

Regulators have been going back and forth on the issue since Financial Accounting Statement 109 was adopted by the Financial Accounting Standards Board in February. The regulators first said they would accept the standard, then told institutions to hold off while they discussed the issue. One of the problems is that regulators are seeking to adopt uniform standards, but they ran into differences of opinion at the various agencies over the potential impact of allowing institutions to count as capital something that is not "cash in hand."

The feeling is acute at the Federal Deposit Insurance Corporation, which would have to absorb the cost if an institution that counts large amounts of deferred tax assets as capital were to fail. The FDIC is also under particular pressure from Congress not to count anything other than actual money in capital because of the political pain associated with the "regulatory goodwill" and regulatory accounting practices that were held to be elements in the need for a bailout of thrifts.

But on a positive note, the FFIEC decision removes potential conflict between GAAP-based reporting on one hand and regulatory accounting practices on the other.

Banks would like to continue the current practice, which is 100% recognition of a deferred tax asset to the extent that it equals the amount that can be carried back against previously paid taxes. Current rules allow reporting of such assets so long as they do not exceed taxes previously paid.

At issue is how much net deferred tax credits can be carried forward and included in capital. The limit regulators set on this amount will affect institutions' capital, particularly those struggling to meet regulatory capital standards.

Regulators became concerned with the accounting for deferred tax assets with the issuance of FASB Statement 109, "Accounting for Income Taxes," in February.

The new standard sets rules for recognizing the amount of taxes payable or refundable for the current year. It also prescribes methods for recognizing deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.

A deferred tax asset or liability represents an increase or decrease in taxes payable or refundable in future years as a result of temporary differences and carryforwards at the end of the current year. Temporary differences become taxable or deductible when then the related asset is recovered or the related liability is settled.

Federal thrift and banking regulators who make up the FFIEC ordered their institutions to delay adoption of Statement 109 for fear that deferred tax assets may be used to increase regulatory capital artificially.

Regulators issued four proposals to deal with the problem: (a) adopt statement 109 for regulatory and accounting purposes; (b) adopt the standard but limit the reporting of net deferred tax assets to previous paid taxes that may be recovered by carrying net operating losses or tax credits back to a previous year; (c) adopt 109 but limit net deferred tax assets to the amount allowed under current rules; (d) adopt one of the two preceding limits only for regulatory purposes.

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