The
OCC, Federal Reserve Board, FDIC and OTS have collectively approved a final
rule that permits banking organizations to reduce the goodwill deduction to
tier 1 capital by the amount of any associated deferred tax liability. Banks,
savings associations and bank holding companies are allowed to adopt this rule
for the reporting period ending December 31, 2008.
Prior
to the adoption of this rule, the tier 1 capital calculation required banking
organizations to deduct the full carrying amount of goodwill and other
intangible assets resulting from a taxable business combination. This full
deduction, however, was inconsistent with other aspects of the tier 1 capital
computation. Other intangible assets acquired in nontaxable transactions, for
example, could be deducted from tier 1 capital net of any associated deferred
tax liability.
In
a taxable business combination, the deferred tax liability arises from differences
between tax treatment and book treatment of the asset. And, that deferred tax
liability is not routinely settled for financial reporting purposes; it remains
until the goodwill is written down, written off or otherwise derecognized. If
the entire amount of the goodwill is impaired, the banking organization would
also derecognize the associated deferred tax liability for financial reporting
purposes. Therefore, the banking organization’s maximum exposure to loss with
respect to the goodwill asset would be the full carrying value of that goodwill
less the deferred tax liability. The spirit of this rule change is to improve
the tier 1 capital computation by reflecting the banking organization’s actual
exposure to loss with respect to goodwill arising from taxable business
combinations. Also,
the banking organization that deducts goodwill net of the associated deferred
tax liability from tier 1 capital may not net that deferred tax liability
against deferred tax assets for the computation of regulatory capital
limitations on deferred tax assets.
Comments largely
positive
On
September 30, 2008, the regulatory agencies published a notice of proposed
rulemaking requesting comments on this change. Of the thirteen comments
received, only two opposed the change. Five comments suggested that the rule be
adopted and available to banking organizations for the reporting period ending
on December 31, 2008. The agencies have agreed with this request.
Some
of the comments also requested that the change be applied to other intangible
assets as well, but did not provide sufficient data or analysis to support that
request.
Other miscellaneous
changes
The
OCC is also adopting other miscellaneous changes as noted in the proposed rule,
including:
·Clarification
of the current treatment of intangible assets acquired due to a nontaxable
purchase business combination
·Replacement
of the term “purchased mortgage servicing rights” with “servicing assets”
·Clarification
of OCC’s interpretation of existing regulatory text
·Amendment
of the goodwill definition to conform to GAAP
