Changes Are Proposed for Accounting for Income Taxes Under FASB ASC

Editor: Sally P. Schreiber, J.D.

Miscellaneous

FASB proposed two standards changes to Accounting Standards Codification (ASC) Topic 740, Income Taxes, that are designed to reduce complexity in accounting for income taxes.

For public business entities, the proposed changes would take effect for annual periods, including interim periods within those annual periods, beginning after Dec. 15, 2016. Early adoption would not be permitted for public business entities.

For all other entities, the proposed amendments would take effect for annual periods beginning after Dec. 15, 2017, and interim periods in annual periods beginning after Dec. 15, 2018. Early adoption would be permitted, but not before the effective date for public business entities.

FASB is seeking comments on both items by May 29. Comments can be made at FASB’s website.

Intra-Entity Asset Transfers

The first item the board is proposing is elimination of the exception in ASC Section 740-10-25, Recognition, that prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party.

This proposal would require that an entity recognize the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs.

Stakeholders have told FASB that the limited amount of authoritative guidance about this exception has led to complexity and lack of uniformity in financial reporting. In addition, stakeholders have informed FASB that the exception does not provide useful information for users of financial statements.

The proposal would align GAAP with IFRS guidance on the recognition of income tax consequences of intra-entity asset transfers.

FASB is aware the proposed amendments might:

• Require an entity to make process and internal control changes.
• Result in the potential for greater volatility in earnings compared to current accounting.

Entities would be required to apply the proposed amendments on a modified retrospective basis. A cumulative-­effect adjustment would be made directly to retained earnings as of the beginning of the period of adoption for the recognition of the income tax consequences of intra-entity asset transfers occurring before the effective date.

At transition, required disclosures would include the nature of and reason for the change in accounting principle, and quantitative information about the effects of the change in accounting.

Balance Sheet Classification

The other change FASB is proposing would affect only entities that present a classified statement of financial position.

To simplify the presentation of deferred income taxes, FASB is proposing that for such entities, deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The proposal would not change the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single account.

The proposal would align GAAP with IFRS in the presentation of deferred income tax assets and liabilities.

Entities would be required to apply the proposed balance sheet changes prospectively to all deferred income tax liabilities and assets. At transition, disclosures would include the nature of and reason for the change in accounting principle and a statement that prior periods were not restated.

Simplification Initiative

The proposals are part of FASB’s Simplification Initiative, which has been undertaken to identify areas in GAAP where cost and complexity can be reduced while maintaining or improving the usefulness of the information for financial statement users.

A standards change issued this ­January, Accounting Standards Update No. 2015-01, resulted in the elimination of the concept of extraordinary items from GAAP.