FASB proposes two ASUs on income taxes as part of simplification initiative
No. US2015-05: January 26, 2015
Proposed changes to the accounting for income taxes could impact the effective tax rates for multi-national organizations and the balance sheet presentation for many reporting entities.
On January 22, the FASB issued an exposure draft of two proposed ASUs related to the accounting for income taxes: Intra-Entity Asset Transfers and Balance Sheet Classification of Deferred Taxes. The proposed ASUs are part of the Board's simplification initiative aimed at reducing complexity in accounting standards.
Existing GAAP for intra-entity asset transfers is an exception to the principle of comprehensive recognition of current and deferred income taxes. Currently, the buyer and the seller in a consolidated reporting group are generally required to defer the income tax consequences of intra-entity asset transfers when the profits from such transfers are eliminated in consolidation. For example, upon an intra-entity transfer of inventory, the seller is required to defer the tax expense on the profit from the transfer and the buyer is prohibited from recognizing the deferred tax benefit on the inventory's increased tax basis. Both the seller's tax expense and the buyer's tax benefit are recognized when the inventory is sold to an outside party. In the case of a transfer of long-lived assets, recognition of the seller's tax expense and the buyer's tax benefit occurs in one or more subsequent periods.
Under the proposed ASU, the exception would be eliminated, and as a result, the seller's tax expense on the profit from the transfers of assets and the buyer's deferred tax benefit on the increased tax basis would be recognized when the transfers occur. As proposed, this would result in the recognition of the tax consequences of intra-entity transfers even though the pre-tax profit is eliminated in consolidation. The Board believes the proposed simplification will reduce diversity in practice and result in more transparent decision- useful information, which in many cases will more closely align with tax cash flows.
Current GAAP requires the deferred taxes for each tax-paying jurisdiction of an entity to be presented as a net current asset or liability and net non-current asset or liability. This requires a jurisdiction-by-jurisdiction analysis of deferred taxes and the underlying classification of the assets and liabilities to which they relate. To simplify presentation, the proposed ASU would require that all deferred tax assets and liabilities be classified as non-current on the balance sheet. The proposed guidance would not affect the existing requirement to offset the deferred tax liabilities and assets of each tax-paying jurisdiction.
As a result, each jurisdiction will now only have one net non-current deferred tax asset or liability.
The proposed ASUs will affect virtually all tax-paying entities that apply U.S. GAAP. In particular, the change to the accounting for intra-entity asset transfers could have a significant impact on reporting entities' income tax provision for the period in which transfers occur and, in turn, the effective tax rate in future periods.
The proposed guidance in both standards would achieve convergence with IFRS on the topics addressed.
The comment period for the exposure draft ends on May 29, 2015. Stakeholders are encouraged to provide comments on the proposals. After considering comments received, the Board expects to finalize the standards later this year.
As proposed, the standards would be effective for annual and interim periods beginning after December 15, 2016 for public business entities, with no option to early adopt. For all others, the standards would be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018. Early adoption would be permitted for non-public companies, but not before the effective date for public business entities. Early adoption, if chosen, would need to be applied to both standards.
Entities will be required to apply the modified retrospective transition approach, with a cumulative catch-up adjustment to opening retained earnings in the period of adoption for the Intra-Entity Asset Transfers standard. Prospective transition would be required for the Balance Sheet Classification of Deferred Taxes standard.
Edward Abahoonie +1-(973)-236-4448 edward.abahoonie@us.pwc.com |
Kyle Quigley +1-(973)-236-7843 kyle.quigley@us.pwc.com |