Guidance for bad debt reserves to remain in U.S. GAAP

When the Financial Accounting Standards Board (FASB) in June 2017 proposed a limited change to U.S. generally accepted accounting principles (GAAP) to eliminate the guidance for deferred tax credits and liabilities for bad debt reserves, it believed the guidance was outdated, and the board expected a quick decision to confirm the proposed elimination.

It turns out, the so-called obsolete guidance on bad debt reserves for savings and loans is still being applied by small banks and thrifts.

It took a letter from a certified public accountant (CPA) in Northeast Texas to point this out.

“All of our bank clients are community banks, and we have a thrift that clearly that rule would still apply to,” George Struve, managing partner at a regional accounting firm in Paris, Texas, told Accounting & Compliance Alert.

After reviewing the feedback and researching the issue, a unanimous FASB on April 11, 2018, agreed to scrap the main part of Proposed Accounting Standards Update (ASU) No. 2017-260, Technical Corrections and Improvements to Topic 942: Financial Services—Depository and Lending—Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans.

“This is a very clear example of why the exposure draft process is so important and why participation in this process is so incredibly important,” FASB member Christine Botosan said. “Despite the very careful work that the staff does, and the number of people we talk to before we expose something, we always learn something in the ED process.”

The bad debt reserve method allows businesses to add a reasonable amount to a reserve in lieu of accounting for specific items of bad debt. Deferred taxes that were recognized on bad debt reserves beginning after Dec. 31, 1987, had to be paid over a six-year period beginning in 1996. Certain thrifts that retained a substantial amount of mortgage lending could defer the payment for two years, the FASB said.

Section 1616 of the Small Business Job Protection Act of 1996 repealed Internal Revenue Code Section 593 for the bad debt reserve method of accounting for thrift savings associations. But the act did not amend Internal Revenue Service (IRS) Code Section 585, which allows the use of the bad debt reserve method of accounting by banks and qualified thrifts defined by Section 581. The retention of Section 585 allowed small banks and thrifts to keep the accounting method, a FASB staff member told the board.

The FASB received six comment letters on the proposal. Struve’s was the only one that mentioned small institutions.

Proposed ASU No. 2017-260 would have eliminated the guidance in FASB ASC 942-740, Financial Services—Depository and Lending—Income Taxes, for bad debt reserves of savings and loans and other qualified thrift lenders that arose after Dec. 31, 1987. The board also decided to create a cross-reference in FASB ASC 740-30, Income Taxes—Other Considerations or Special Areas, to the remaining guidance in Subtopic 942-740 on bad debt reserves of savings and loans that are recognized on or before Dec. 31, 1987, for which no deferred income taxes have been recognized.

The board, however, agreed to finalize an amendment that erases a reference to the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges, from FASB ASC 942-740-45-1, Financial Services—Depository and Lending—Income Taxes — Other Presentation Matters — Differences Between Regulatory Accounting Principles and GAAP, formerly Emerging Issues Task Force Issue (EITF) No. 85-31. The Banking Circular was issued in 1985 but has been rescinded because it is considered outdated.

The FASB on April 11 also largely approved the technical corrections issued in October via Proposed ASU No. 2017-320, Codification Improvements. The package was released as part of the board’s regular effort to comb through the Codification of U.S. GAAP to eliminate out errors and make improvements.

The board agreed to revise the basis for conclusions for a change proposed to FASB ASC 940-405, Financial Services—Brokers and Dealers—Liabilities, and be silent on the offsetting requirements for securities borrowed and loaned transactions. Financial professionals told the board that the basis for conclusions could be misinterpreted.

“The issue is, any mention of the securities loaned and borrowed transactions needing to meet the intent criterion could lead people to think they can’t be offset, period,” said FASB project manager Regenia Cafini. “That was not our intent. Our intent was just to clean up this guidance and provide pointers to the guidance that needed to be considered.”

The FASB agreed not to mention any transactions in the basis for conclusions.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

We have partnered with Thomson Reuters to issue our monthly Accounting insights. Please feel free to contact Baker Tilly at if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2018 Thomson Reuters/Tax & Accounting. All Rights Reserved.