The regulators said the release of their guidance on the subject Wednesday was prompted by the fact that some banks have been going about the deferred compensation accounting the wrong way, Dow Jones reported. This week’s guidance is a joint effort of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
“Banks should review their accounting for these agreements to ensure that they are being properly reported and make changes, if necessary, in their March 31, 2004, call reports,” said Michael Zamorski, the FDIC’s supervision director, in a letter to banks.
Problems became apparent during regulators’ bank examination process, particularly regarding a type of deferred compensation called an indexed retirement plan, or a revenue neutral plan. Banks often buy life insurance along with these plans, so bank-owned life insurance is included in the new guidance, the regulators explained.
The agencies said that life insurance needs to be reported separately from other deferred compensation because there is no “right of offset.” Also, banks should only record the amount that could be realized under the insurance contract as of the balance sheet date, the regulators asserted.
The agencies identified three common accounting mistakes regarding the deferred compensation agreements:
- failure to accrue a liability for the estimated cost of some benefit payments,
- failure to accrue the net present value of the expected future benefit payments, and
- failure to consider the impact of vesting provisions on the eligibility date.