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The proposed accounting standards update would require entities to recognize the income tax consequences of transferred assets at the date of transfer. While some entities will need to make internal control and process updates to ensure compliance, the future cost of compliance is expected to be reduced because of the elimination of the need to identify and track deferred charges for the selling entity’s tax jurisdiction, deciding when to recognize the deferred charges in the income statement, and the evaluation of impairment for the deferred charge. The recognition of the income tax effect of intra-entity asset transfers is expected to make the financial statements more useful for users, but will increase volatility in earnings during periods when the transfer occurs.

Changes to intra-entity asset transfers income tax recognition would be applied on a modified, retrospective basis. Entities would need to apply a cumulative-effective adjustment directly to retained earnings at the beginning of the adoption period to recognize the income tax consequences for previously internally transferred assets.

Balance Sheet Classification

U.S. GAAP currently requires entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The separation, stakeholders told FASB, is costly for entities and does not provide useful information to financial statement users about the timing of recognition of deferred income tax assets

The financial accounting Standards Board (faSB) recently proposed changes to income tax reporting. The Board released an exposure draft on January 22, 2015, that affects Income Taxes (Topic 740) for intra-entity asset transfer and the balance sheet classification of deferred income taxes.

Changes in the updates are designed to streamline current practices and simplify financial reporting requirements. The FASB is accepting comments on both of the proposed updates through May 29, 2015. As proposed, the new standards would first be implemented for calendar years ending December 31, 2017, and interim periods within those years.

Intra-Entity Transfers

Under U.S. generally accepted accounting principles (GAAP), recognition for income tax consequences for intra-entity transfers amongst consolidated entities occurs when the asset is transferred to an outside entity. This practice is an exception to the typical treatment of income tax consequences. Stakeholders brought the issue to FASB because the exception produced diversity in practice and significantly increased the cost of compliance.

February 2015

Proposed Simplification of Income Tax Accounting

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and liabilities because the classification as current or noncurrent is not consistent with when the deferred item will be recovered or settled.

The proposed update would require entities to prospectively classify all deferred income tax assets and liabilities as noncurrent in the classified statement of financial position. The change would reduce costs in evaluating deferred income taxes by eliminating requirements to associate the classification of deferred income taxes with the underlying assets and liabilities that gave rise to the deferral, and by not having to estimate the period of reversal for those deferred income tax items that are not related to an asset or liability. Entities would still be required to net the deferred income tax assets and liabilities that are related to a single tax paying jurisdiction.

Proposed Effective Dates

The proposals by the FASB, would require public business entities to implement the new standards for interim and annual periods beginning after December 15, 2016. All others would adopt the new standards for annual periods beginning after December 15, 2017 and interim periods within annual periods after December 15, 2018. It is proposed that nonpublic business entities can adopt the requirements as early as the public company effective date, but that both proposals must be adopted at the same time if early adopted.

For More Information

If you have any specific questions, comments or concerns, please share them with your local MHM service professional.