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FEDERAL RESERVE BANK OF NEW YORK <s\'\oisq January 6, 1995 FINANCIAL ACCOUNTING STANDARDS — Accounting by Creditors for Impairment of a Loan (FAS 114) — Accounting for Income Taxes (FAS 109) To All Depository Institutions in the Second Federal Reserve District: Printed on the following pages is the text of a statement issued by the Federal Financial Institutions Examination Council (FFIEC) through its Task Force on Supervision dealing with (1) the reporting of allowances for loan losses (FASB Statement No. 114), and (2) the amount of deferred tax assets that can be used to meet capital requirements (FASB Statement No. 109). Concerning the latter, the Board of Governors of the Federal Reserve System has issued final amendments to its capital adequacy guidelines for State member banks and bank holding companies to establish limitations, as recommended by the FFIEC, on the amount of certain deferred tax assets that may be included in Tier 1 capital; those amendments will be mailed to you shortly. Questions regarding either of these matters may be directed to Stephanie Martin, Senior Financial Specialist, Bank Analysis Department (Tel. No. 212-720-1418). Christine M. Cumming, Senior Vice President. Federal Financial Institutions Examination Council 2100 Pennsylvania Avenue, NW, Suite 200 • Washington, DC 20037 • (202) 634-6526 • FAX (202) 634-6556 Press Release The Task Force on Supervision of the Federal Financial Institutions Examination Council (FFIEC)1 announced today its decision regarding the regulatory reporting treatment of allowances established under Statement No. 114, Financial Accounting Standards Board (FASB) "Accounting by Creditors for Impairment of a Loan” (FAS 114), and its recommendation to the agencies pertaining to regulatory capital issues arising from FASB Statement No. 109, "Accounting for Income Taxes" (FAS 109). The Task Force's actions were taken under delegated authority. FAS 114 The Task Force on Supervision has decided that the portion of an institution's allowance established pursuant to FAS 114 should be reported as part of the general allowance, which is 1 The FFIEC consists of representatives from the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) (referred to as the "agencies”) , and the National Credit Union Administration. The Task Force on Supervision is comprised of staff members from each of the agencies. The actions discussed in this press release are not directed to credit unions. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision 2 includable in Tier 2 capital subject to a limit of 1.25 percent of gross risk-weighted allowance amounts assets. is general identified as In in nature, losses concluding the Task (i.e., loss that Force the 114 that notes FAS all classifications) are excluded from the general allowance. The Task Force has also reaffirmed existing supervisory policies that require banks to promptly charge-off identified losses and require savings associations to promptly charge-off or use specific allowances (which are reported separately from general allowances) for identified losses. With respect to impaired collateral-dependent loans, the agencies generally classify as loss any portion of the loan balance that exceeds the amount that is adequately secured by the fair value of the collateral; such losses on collateral-dependent loans will not be included in the general allowance or Tier 2 capital. Also, as previously announced, the FFIEC has decided to maintain its existing regulatory nonaccrual policies for problem loans. FAS 109 The Task Force on Supervision is recommending to the agencies that they finalize their proposed amendments to regulatory capital standards to limit reported pursuant to FAS requirements. that, to the the amount 109 that of deferred can be used As previously proposed, extent the realization tax to meet assets capital the Task Force recommends of deferred tax assets is dependent on an institution's future taxable income, such deferred tax assets be limited for regulatory capital purposes to the amount 3 that the institution expects to realize within one year of the quarter-end report whichever is less. date, or ten percent of Tier 1 capital, Under the Task Force's recommendation, deferred tax assets that can be realized from taxes paid in prior carryback years and from future reversals of existing differences would generally not be limited. taxable temporary
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