The document summarizes important accounting considerations related to deferred tax assets and an FASB exposure draft on impairment. It discusses how Basel III proposals would impact the treatment of deferred tax assets for regulatory capital purposes. It also outlines the key aspects of the FASB's proposed new model for recognizing credit impairments, known as the current expected credit loss model, which would replace the existing incurred loss approach.

1. IMPORTANT ACCOUNTING
AND TAX CONSIDERATIONS
THAT WILL IMPACT
GROWTH AND CAPITAL
DECISIONS
Bill Reilly, Financial Services National Tax Partner
Markus Veith, Financial Services Audit Partner
March 6, 2013

2. Disclaimer
This presentation is not a comprehensive analysis of the subject
matters covered and may include proposed guidance that is subject
to change before it is issued in final form. All relevant facts and
circumstances, including the pertinent authoritative literature, need
to be considered to arrive at conclusions that comply with matters
addressed in this presentation. The views and interpretations
expressed in the presentation are those of the presenters and the
presentation is not intended to provide accounting or other advice
or guidance with respect to the matters covered.

3. MEET YOUR PRESENTERS
CONTACTS
Bill Reilly Markus Veith
Financial Services National Tax Partner Financial Services National Audit Partner
T: 212-624-5420 T: 212-624-5370
E: bill.reillyl@us.gt.com E: markus.veiths@us.gt.com

4. AGENDA
• BASEL III and Deferred Tax Assets
• FASB Exposure Draft of Impairment
Abbrev. Description
DTAs Deferred tax assets
DTLs Deferred tax liabilities
NOL Net operating loss
VAs Valuation allowances

5. DEFERRED TAX ASSETS
BACKGROUND
• Deferred tax assets (DTAs) and liabilities (DTLs) occur when there is a difference between the
accounting and tax treatment of an asset or liability. Generally, DTAs represent a future tax
benefit, while DTLs represent a future tax liability.
• DTAs are usually calculated by taking the tax effect of:
i. the difference between the book carrying value and tax basis (temporary difference DTA),
or
ii. the carryover of a tax benefit (carryover DTA).
• A common DTA is a NOL carryforward. This DTA is calculated by multiplying the tax NOL
carryforward by the tax rate (combined federal and state).
Temporary Deferred Tax Basis minus Book Tax rate
Tax Assets (DTAs) Carrying Value (federal and state)
Carryforward Deferred Carryforward Tax rate
Tax Assets (DTA) Amount (federal and state)
e.g., NOLS

6. DEFERRED TAX ASSETS
BACKGROUND
• The question as to how much of these DTAs should be included in Bank's Tier 1
capital has been a hot debate, especially during and after the financial crisis.
Regulators worry about the risk of realizing DTAs.
• One large Bank's DTA exceeded its market capital at one point during the financial
crisis.
• University of North Carolina study concluded that Banks with a larger proportion
of DTA in their asset mix were more likely to fail.1
1John Gallemore, Deferred Tax Assets and Bank Regulatory Capital, University of North Carolina, January 2012

7. PRE-BASEL III
TREATMENT OF DTAs (U.S.)
• Generally, DTAs cannot represent more than 10% of a Bank's Tier 1 capital.
• DTAs are netted against DTLs and valuation allowances (DTA – DTLs – VAs).
Netting of DTLs is not done on a jurisdiction by jurisdiction basis.
• Carryback claims (e.g. NOL carrybacks) are considered good (count for Tier 1 capital)
DTAs because their realizability can be determined.
• The DTA that is left after subtracting DTLs, VAs, and any DTA related to a carryback
claim can be further used as asset for Tier 1 capital if it can be used to offset projected
taxable income within the next 12 months (12 months from the date of the report).
• Again, the DTA stated above (based on 12 months taxable income) cannot exceed 10%
of the Bank's Tier 1 capital.

8. GAAP
RULES
• Under the GAAP rules, DTAs can be booked if it is more likely than not that they will
be realized.
• This realization is based on future income. A valuation allowance is booked where
future income is questionable.
• Projections can be used to predict future taxable income. In addition, tax planning
strategies can be used to rationalize DTAs.
IFRS
RULES
• International: Generally, IFRS books DTAs in an amount the management thinks
they can realize. This amount is typically considered a good asset for Tier 1 capital in
foreign jurisdictions.

9. BASEL III
DEFERRED TAX ASSETS (DTAs)
• Subject to change and interpretation.
• NOL carrybacks allowed for Tier 1 capital subject to 100% risk weighting.
• DTLs and VAs will be subtracted from DTAs. However, they will be allocated
(guidance needed) between carryforward type DTAs (e.g. NOLs) and Temporary
difference DTAs.
• After allocating DTLs and VAs, the net carryforward DTAs must be subtracted in
full from the good DTA allowed as Tier 1 capital. They are completely removed
from the Tier 1 capital calculation. (No more 12-month income projection)

10. BASEL III
DEFERRED TAX ASSETS (DTAs)
• After allocating DTLs and VAs, the net temporary difference DTA is subject to a 10%
and 15% limitation. Note: In addition to the 10% limitation on temporary difference
DTAs, there is a separate 10% test for mortgage servicing rights (MSRs) and minority
investments in other financial institutions.
• A 15% limitation is applied to three items collectively:
– temporary difference DTAs.
– MSRs
– minority investments in other financial institution
• 250% risk weighting on allowable temporary difference DTAs.

11. BASEL III
DEFERRED TAX ASSETS (DTAs)
• VAs are allocated to the DTA to which they relate.
• DTLs netted against specific assets first (Goodwill, MSRs), remaining DTL Allocated pro-rate to remaining
DTAs. DTLs netted on a jurisdiction by jurisdiction basis were offset is permitted (this is a new restriction).
• *Transitional Rules (Delay the pain over 5 years):
– Net carryforward DTAs:
• phased in 2014 (20%) to 2017 (80%) [20% per year]
• Whatever is allowed for common equity Tier 1 (CET1) is fully deducted for Tier 1. So, as of 2013
no carryforward DTAs allowed for Tier 1 capital. Risk weighing of allowed amount for CET1 not
mentioned.
– Net Temporary Difference DTAs
• same 20% phase in as above
• 15% limit only on CET1
• 100% risk weighing of allowed amount
* BASEL III, capital rules postponed in November 2012 (indefinitely?)

12. PLANNING &
STRATEGY
• Banks are looking at strategies to accelerate income to reduce DTAs where
applicable.
• Banks are looking for strategies that convert an NOL carryforward DTA (that
BASEL III will subtract 100% of from Tier 1 capital) to another asset (security)
DTA that will not be subtracted from Tier 1 capital.

13. FASB EXPOSURE DRAFT
ON IMPAIRMENT

14. FINANCIAL INSTRUMENTS:
IMPAIRMENT
BACKGROUND
• Identified weaknesses in today's model
– "Incurred" loss threshold that was seen as delaying recognition of losses
– Complexity with multiple existing credit impairment models for debt
instruments such as
• Other-than-temporary impairment
• ASC 310-30 (SOP 03-3)

15. FINANCIAL INSTRUMENTS:
IMPAIRMENT
SCOPE
• Financial assets that are debt instruments classified at:
– amortized cost
– FV-OCI
• Receivables that result from revenue transactions within the scope of Topic 605
• Reinsurance receivables that result from insurance transactions within the scope of
Topic 944.
• Lease receivables recognized by a lessor in accordance with Topic 840
• Loan commitments

16. FINANCIAL INSTRUMENTS:
IMPAIRMENT
Current Expected Credit Loss
(CECL) Model
• Single measurement objective: current estimate of all contractual cash flows not
expected to be collected
– would remove "probable" threshold
– neither a best case or worst case scenario
• Broadens information that must be considered
– internal and external
– past events, including historical loss experience
– current conditions
– reasonable and supportable forecasts
• No specific guidance as to whether credit losses should be measured on an
individual or collective (pool) basis

17. FINANCIAL INSTRUMENTS:
IMPAIRMENT
Current Expected Credit Loss
(CECL) Model
• Estimate shall reflect time value of money
– Example: discounted cash flow
– Other approaches implicitly consider time value of money such as loss-rate
methods, roll-rate methods, and probability-of-default methods
– FV of collateral permitted for collateral dependent financial assets
• Intended to leverage existing internal credit risk management tools and systems;
however, inputs to the measure will change

18. FINANCIAL INSTRUMENTS:
IMPAIRMENT
Current Expected Credit Loss
(CECL) Model
• Purchased credit impaired (PCI)
– Follow same measurement approach as originated and non-PCI assets
– Bifurcate discount between credit and non credit components
– Day 1 – recognize ALLL based on management's current estimate of
contractual cash flows that the entity does not expect to collect
– Day 2 - favorable and unfavorable changes in the ALLL recognized
immediately through provision for loan losses

19. FINANCIAL INSTRUMENTS:
IMPAIRMENT
OTHER CONSIDERATIONS
• An entity may elect, as practical expedient, not to recognize expected credit losses for
FV-OCI financial assets if both:
– FV > amortized cost
– Expected credit losses are insignificant
• Retains troubled debt restructuring concept
• Nonaccrual when it is not probable that the entity will receive substantially all of the
principal or interest
• Charge-off when determine that there is no reasonable expectation of future recovery
• Expanded disclosures
• Interaction with BASEL III and other regulatory changes

20. FASB EXPOSURE DRAFT ON
IMPAIRMENT
FASB vs. IASB MODEL
FASB proposal IASB proposal
Measurement objective Single measurement Two different measurement
objective – all expected objectives
credit losses • 12 months of expected credit
losses
• All lifetime expected losses
Proposal includes criteria to decide
which measurement objective
should be followed

21. FASB EXPOSURE DRAFT ON
IMPAIRMENT
EFFECTIVE DATE
• Effective date: To be determined
• Transition: cumulative-effect adjustment to the statement of financial position as
of the beginning of the first reporting period in which the guidance is effective
• Comments on proposal due by April 30, 2013

22. ASU 2013-3
FAIR VALUE DISCLOSURE OF
NON-PUBLIC ENTITIES
• ASC 825-10-50-10(d) requires an entity to disclose the level of the fair value
hierarchy within which the fair value measurements are categorized in their entirety
(Level 1, 2, or 3) for items that are not measured at fair value in the statement of
financial position but for which fair value is disclosed.
• It was not the Board's intent for this disclosure requirement to apply to nonpublic
entities
• On February 7, 2013, the FASB issued ASU No. 2013-03, which clarifies that the
above mentioned disclosure requirement does not apply to nonpublic entities

23. PRACTICE ISSUES
• Mortgage Purchase Programs
• Chapter 7 bankruptcy

24. REGULATOTY UPDATE
REGULATORS' HIGH EXAM
FOCUS
• Banking Regulators have identified high exam focus areas:
– Strategic
– Credit and Price
– Compliance and Reputation
– Operational

25. REGULATOTY UPDATE
REGULATORS' HIGH EXAM FOCUS
Strategy
Summary Potential Impact
§ Challenging banking environment Regulators are concerned that
decisions made today may create
problems of tomorrow.
ü declining loan demand
Banks should place specific
emphasis on processes for
ü margins under pressure due to lack of managing risks associated with new
products, services or locations.
investment alternatives Also there is a need to ensure that
interest rate and/or credit risk
ü diminishing opportunities for fee income assumed by higher yielding or
longer term maturity assumptions is
fully assessed. Appropriateness of
ü increasing overhead model assumptions and multiple
rate scenarios are important .

26. REGULATOTY UPDATE
REGULATORS' HIGH EXAM FOCUS
Credit and Price
Summary Potential Impact
§ Supervisory Focus Points Regulators believe CRE and OREO
exposure remains high in the
ü quality of new underwriting system but risk is now largely
identified. Pre-funding analysis by
ü adequacy of post-funding monitoring (problem banks is generally good but
regulators' emphasis is on post-
loan identification) funding attention. They believe this
is an integral component to the
ü concentration risk – vulnerability assessments, timely identification of potential or
appropriateness of risk limits and capital emerging problem loans.
planning
Concern also over competitive
pressures and declining loan
ü directional consistency of ALLL (risk appetite
demand and the possibility that this
changing?) could lead to loosened underwriting
and/or risk/return concerns.

27. REGULATOTY UPDATE
REGULATORS' HIGH EXAM FOCUS
Compliance and Reputation
Summary Potential Impact
§ Supervisory Focus Points Risk is increasing due to the large
number of regulatory changes as
well as the heightened attention on
• Assess adequacy of bank’s processes to comply consumer protection issues.
with new consumer requirements – compliance Other areas of emphasis:
officer, audits, etc. • Fair lending
ü Place particular emphasis on new sources of • Overdraft/deposit related
products
interest or fee income from new products or
• Consumer mortgage
services foreclosure processes
• BSA/AML
ü Assess compliance with the Foreclosure
Management Supervisory Guidance

28. REGULATOTY UPDATE
REGULATORS' HIGH EXAM FOCUS
Compliance and Reputation
Summary Potential Impact
§ Supervisory Focus Points Advances in technology create new
risks. Delivery of new products and
services must have requisite risk
• Assess the adequacy of internal controls and audit management.
coverage relative to the complexity of products and Losses from internal and external
perpetrated fraud continue to be a
services offered.
big concern.
ü ensure sufficient resources are devoted toward Concern is that there are no
fundamental breakdowns in internal
fraud detection systems controls or adequacy of audit
programs..
ü perform sufficient penetration testing at least
annually
ü periodic testing of business continuity plans

29. QUESTIONS AND
ANSWERS

30. PRESENTER
BIOGRAPHY
Bill Reilly
Financial Services National Tax Partner
Grant Thornton LLP
Bill has more than 25 years of professional tax experience serving the financial services industry.
Bill has extensive experience in providing a variety of tax planning services to commercial banks, investment banks and asset managers.
Bill provides assistance to banks in tax return compliance matters, tax accounting, and tax treatment of complicated transactions. He
consults both international and domestic banks.
He also provides consultation to clients on tax issues related to mergers and failed bank acquisitions (FDIC), reorganizations and
establishing the most efficient structures.
Bill has worked extensively in providing tax planning and effective tax rate management for federal, international, state and local taxes,
accounting for income taxes (FIN 48 and FAS 109), and tax return matters.
Bill has a Bachelors degree in English and Political Science and a Masters of Accountancy from The State University of New York.

31. PRESENTER
BIOGRAPHY
Markus Veith
Financial Services National Audit Partner
Grant Thornton LLP
Markus is a Partner in the New York Financial Services Practice and an IFRS specialist. Markus has over 20 years of experience in
banking and public accounting.
Markus has led audit engagements of both public and private financial services organizations ranging from large multinational
institutions to local FDIC-insured banks and federal credit unions. He also led consulting projects on loan reviews, operational process
reviews, post-merger integration, due diligence and asset securitization. Other areas of concentration include capital raises and IPOs.
He also works and assists other offices with IFRS audits, reviews and conversions. He has worked with banks, securities and
commodities broker/dealers, REITs, BDCs, private equity groups, finance and investment companies. His clients include companies
with multistate and multinational operations.
Prior to joining Grant Thornton LLP, Markus worked for Deloitte and McGladrey. He began his career in Europe with a regional
savings bank affiliated with DZ BANK AG – one of Europe’s leading financial organizations. Markus presents frequently to industry
groups and at internal training courses. He also regularly speaks to trade groups and the business press. Markus was quoted extensively
on the Financial Reform Act in a July 2, 2010 article titled “The Shape of Things to Come,” in The Deal. One of his articles on the
Financial Reform Act was also published in 2010 in an industry newsletter.
Page 8

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