All indicated that some form of guidance in this area is needed. Some pointed out that the accounting rules for deferred taxes are in the process of changing. In view of this, some suggested that an insert to the Handbook would be premature at this time. As a result of this input, this examining circular was deemed the most appropriate form of guidance at this time. Once FASB 96 is adopted, we will consider adding a section on deferred taxes to the Handbook.
Many banks continue to have difficulty accounting for deferred income taxes.
Errors in reporting deferred taxes can cause a bank to misstate its earnings, capital, and related financial ratios. If a bank's book tax expense is more than the actual tax due, the difference is a deferred tax liability. Conversely, if book tax expense is less than the actual tax due, the difference may be a deferred tax asset. The cumulative tax effect of all timing differences is reported as either a net deferred tax asset or liability on the balance sheet. An appropriate first step is to determine whether the deferred tax accounts reconcile for the current period.