FASB Simplifies Financial Reporting for Income Taxes

FASB issued an accounting standard Monday that is designed to simplify the financial reporting for the income tax consequences of intra-entity transfers other than inventory.

The standard resulted from a suggestion by stakeholders as part of FASB’s Simplification Initiative, which aims to reduce complexity in accounting standards without sacrificing useful information for financial statement users.

Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, eliminates an exception to the principle of comprehensive recognition of current and deferred income taxes that has existed in current GAAP.

Under the new standard, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the transfer occurs. Under current GAAP, entities are prohibited from recognizing current and deferred income taxes for an intra-entity transfer until the asset is sold to a third party. Examples of assets that would be affected by the new guidance are intellectual property and property, plant, and equipment.

Stakeholders had told FASB that the exception in GAAP resulted in an unfaithful representation of the economics of an intra-entity asset transfer because the exception requires deferral of the income tax consequences of the transfer, including income taxes payable or paid.

The board decided not to change GAAP for an intra-entity transfer of inventory because of stakeholders’ concerns about the anticipated benefits and costs. The new standard aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with IFRS.

For public business entities, the amendments take effect for annual reporting periods beginning after Dec. 15, 2017, including interim periods within those annual reporting periods. For all other entities, the standard takes effect for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual periods beginning after Dec. 15, 2019.

Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.

—Ken Tysiac (ktysiac@aicpa.org) is a Journal of Accountancy editorial director.