Previous Document IconPrevious Document

Next Document IconNext DocumentExam Manual Table of Contents IconList of Bookletters

Type: Bookletter

Effect of FAS 158 on Regulatory Capital
Old/Additional ID:

January 8, 2008

To: The Chief Executive Officer
From: Nancy C. Pellett
Subject: Effect of FAS 158 on Regulatory Capital

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires sponsors of a single-employer defined benefit postretirement plan, such as a pension plan or health care plan, to recognize the funded status of each such plan on its balance sheet. An overfunded plan is recognized as an asset, while an underfunded plan is recognized as a liability. These over- and under-funded amounts must be recorded as adjustments to currently reported balance sheet amounts through initial and ongoing entries to the accumulated other comprehensive income (AOCI) accounts in equity capital. Farm Credit System (System) banks affected by the requirements of FAS 158 must recognize its initial effects, if any, for financial reports issued as of December 31, 2007.

The funding status of these postretirement plans will change with the market valuation of plan assets; consequently, equity capital will fluctuate. The funding status of these plans and the effect on the plan sponsor’s balance sheet will provide useful information to plan participants, purchasers of System debt, and others, including the Farm Credit Adminstration (FCA). For regulatory capital purposes, though, the application of FAS 158 could make it more difficult to monitor other changes in the bank’s risk-adjusted assets and regulatory capital. Consequently, the FCA has determined that the denominator of the net collateral ratio should exclude the effects of the adoption and application of FAS 158.1

The application of FAS 158 will have no effect on System institutions’ permanent capital, total surplus, and core surplus calculations because FCA Regulation 615.5207(j) already requires the exclusion from permanent capital--and, by extension, from total surplus and core surplus as well--of “the net effect of all transactions covered by the definition of ‘accumulated other comprehensive income’ contained in the Statement of Financial Accounting Standards No. 130, as promulgated by [FASB].” Consequently, FAS 158 would affect only “total liabilities,” the denominator of the net collateral ratio.

We direct each affected Bank to exclude the effects of the application of FAS 158 from the net collateral calculation, as follows:

For further information on accounting for defined benefit postretirement plans, institutions should refer to FAS 158; SFAS 87, Employers’ Accounting for Pensions; and FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.

If you have questions on the guidance provided in this bookletter, please contact Thomas Dalton, CPA, Associate Director, Office of Regulatory Policy, at (703) 883-4460 (or by email at or William Dunn, Senior Financial Analyst, CFA, CPA, Office of Regulatory Policy at (703) 883-4489 (or by email at

1The Federal banking agencies require their regulated entities to exclude from regulatory capital any amounts recorded in AOCI resulting from the adoption and application of FAS 158. See: Office of the Comptroller of the Currency, Joint News Release NR 2006-136, “Agencies Announce Interim Decision on Impact of FAS 158 on Regulatory Capital,” December 14, 2006.

[FCA Home | FCA Handbook]