FASB decides to propose changes to income tax accounting
October 2014
During its decision-making meeting on October 22, 2014, the Financial Accounting Standards Board ('FASB' or 'Board') agreed to issue an exposure draft related to the following two income tax accounting topics:
The Board directed the FASB staff to prepare an exposure draft in order to solicit broad stakeholder input. The draft is expected to be issued in January 2015. Stakeholders will have the opportunity to provide feedback during a 120-day comment letter period.
On October 22, 2014, the FASB held a decision-making meeting with the purpose of deciding on whether to issue an exposure draft related to potential changes to the accounting for income taxes that could reduce complexity. The Board voted on various items throughout the meeting including the changes to be proposed, transition methods, transition disclosures and effective dates.
The impetus for the consideration of these topics came from several sources. For more information, please refer to our recent TAS publications covering the August agenda prioritization meeting FASB adds income tax accounting topics to its agenda , September pre-agenda discussion meeting FASB discusses income tax accounting for stock compensation and October agenda prioritization meeting FASB adds stock compensation tax accounting topics to its agenda.
After conducting research as directed by the Board, the FASB staff presented the Board with specific recommendations for improving the accounting for income taxes. The Board voted to include two income tax accounting changes in an exposure draft expected to be released in January 2015.
In addition, the FASB staff will continue researching the possibility of entirely eliminating the intraperiod tax allocation rule.
All of the issues being considered by the FASB were recently highlighted in PwC's Point of view: Accounting for income taxes – A case for simplification.
One of the changes will require recognition of the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs. This would replace the current exception which requires that both the buyer and the seller in a consolidated reporting group defer the income tax consequences of intra-entity asset transfers.
The FASB staff presented two alternatives to the Board:
The Board noted that alternative B should reduce complexity for users, preparers, regulators and auditors of financial statements. Alternative B would also allow convergence with IFRS and result in accounting that will be more transparent and in many cases closer to reflecting tax cash flows.
Ultimately, the Board voted to include alternative B in the exposure draft.
The Board also agreed to the staff's recommendation to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. This would replace the current guidance which requires deferred taxes for each tax-paying component of an entity to be presented as a net current asset or liability and a net non-current asset or liability. The proposed guidance would also converge with IFRS.
Finally, the Board voted on the staff’s recommendations for transition methods and effective dates. The Broad agreed to a modified retrospective transition approach (i.e., cumulative catch-up adjustment to opening retained earnings in the period of adoption) for the intercompany transactions topic and prospective transition for the classification topic.
In the period of adoption, transition disclosures will include: (1) the nature of and reason for the accounting change and (2) the method of applying the change which would include the effects of the change on any affected financial statement line item and per-share amounts for the current period. In lieu of disclosing the effects of the change on the balance sheet for the classification topic, the Board agreed that the disclosure would note that the presented balance sheets are not comparable.
The changes would be effective for financial reporting years beginning after December 15, 2016 for public companies. For private companies, changes would be effective for the year-end financial statements for financial reporting years beginning after December 15, 2017 and interim periods in the following year. Early adoption to the public companies’ effective date would be permitted for private companies. Early adoption, if chosen, would need to be applied to both topics.
The steps recently taken by the FASB and the ongoing efforts of the FASB staff are intended to reduce the complexity of accounting for income taxes. Organizations should be giving attention to the implications of the changes being proposed in these tax accounting areas. Consideration should be given to responding to the exposure draft once it is issued.
There are also likely to be further near-term developments as the FASB works through the relevant tax accounting topics related to stock- based compensation now on its agenda. Income taxes are also included in the Disclosure Framework project and the FASB staff continues to study intraperiod tax allocation.
For a deeper discussion of how the FASB actions may affect your business, please contact:
David Wiseman +1-(617)-530-7274 david.wiseman@us.pwc.com |
Edward Abahoonie +1-(973)-236-4448 edward.abahoonie@us.pwc.com |
Kyle Quigley +1-(973)-236-7843 kyle.quigley@us.pwc.com |