Monthly LRA Update

ACCOUNTING DEVELOPMENTS

OCC Bank Accounting Advisory Series Updated

On August 17, the OCC released an update to the Bank Accounting Advisory Series (BAAS). The BAAS does not represent rules or regulations of the OCC. Rather, it represents the OCC’s Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented.

Of note, Topic 5(B) of the BAAS addresses a number of questions related to Life Insurance and Related Deferred Compensation. This year’s update adds a new question (number 8) in this section:

Facts A bank acquires BOLI policies on certain key employees. In addition, the bank entered into supplemental life insurance agreements with those employees whereby the bank has agreed to share death benefits on the BOLI policies with the employees’ beneficiaries should those employees die while actively employed by the bank. The terms of the supplemental life insurance agreements with those employees do not include provisions giving rise to an in-substance post-retirement benefit plan or to in-substance individual deferred compensation contracts.

Question Should the bank accrue a liability for the death benefits due the employees’ beneficiaries if the employees die while actively employed by the bank?

Staff Response No. For endorsement split-dollar life insurance arrangements an employer must recognize a liability for future benefits in accordance with ASC 715-60 if, in substance, a post-retirement benefit plan exists or ASC 710-10 if the arrangement is, in substance, an individual deferred compensation contract. The arrangement between the bank and the employee is neither a post-retirement benefit plan nor a deferred compensation contract. The supplemental life insurance agreements between the bank and the employees only provide for sharing death benefits if an employee dies while actively employed by the bank.

The BAAS also added the following Q&A related to NOL carryforwards in Section 7(B) Tax Sharing Arrangements:

Facts The bank is a member of a consolidated group subject to a tax sharing agreement. On a stand-alone basis, the bank has recognized a DTA arising from an NOL carryforward. The bank has not been able to use the NOL carryforward on a stand-alone basis. The consolidated group likewise has previously been unable to use the NOL carryforward. In the current period, the consolidated tax filing group incurs a tax loss and does not have a tax liability, so the NOL carryforward remains unused.

Question Is the bank permitted to transfer its NOL carryforward to the parent of the consolidated tax filing group?

Staff Response No. Call report instructions state that a bank should generally account for income taxes as if the bank were a separate entity. As such, the payment or transfer of deferred taxes by the bank to another member of the consolidated group is generally prohibited. There is an exception to this general rule for certain NOL carryforwards that are utilized.

Because the consolidated tax group does not have a current tax liability, the exception does not apply. The parent cannot use the bank’s NOL carryforwards in the current period; therefore, the bank cannot transfer its NOL carryforward to the parent of the consolidated tax filing group in the current period.

If the bank would not have been able to use the NOL carryforwards on a standalone basis but the parent in a consolidated tax filing group can use the bank’s NOL carryforwards to offset the consolidated group’s tax liability, the bank may transfer its NOL carryforwards to the parent in exchange for cash. The parent must reimburse the bank for use of the bank’s NOL carryforwards if the bank would have been able to use the NOL carryforwards to offset its standalone tax liability, even if it cannot be used by the consolidated group.

The OCC updates the BAAS annually.

OTHER DEVELOPMENTS

Managing Mortality Costs within COLI/BOLI Programs – Publication

In August, the Society of Actuaries’ Product Matters! published an article titled Managing Mortality Costs within COLI/BOLI Programs. Authored by Matt Schoen and James Van Etten, this is a follow up to the first article published in June.

Among other findings and observations, this article cautions potential purchasers of BOLI to be mindful of the degree to which the insurance company issuer retains discretion to adjust mortality related charges over time. “The most fundamental step in the direction of minimizing excessive costs with pooled mortality designs is to obtain written assurance that the carrier will only change COIs based on changes to mortality experience and expectations of future mortality experience.”

The article includes additional recommendations for pre-purchase due diligence, such as reviewing the insurance policy’s filing, actuarial memorandum, and determination procedures for the non-guaranteed elements.

BIS Revisions to the Principles for the Sound Management of Operational Risk

In August, the BIS released a Consultative Document titled Revisions to the Principles for the Sound Management of Operational Risk. The BIS defines operational risk in the capital framework as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.” The definition includes legal risk but does not include strategic or reputational risk.

This Consultative Document sets forth 12 principles for an effective Operational Risk Management Framework (ORMF). The principles begin with appropriate board involvement and then emphasize the importance of establishing a robust governance structure that includes business unit management, independent risk, and independent assurance.

Comments on the consultative document are due by November 6.