Reading and vocabulary

The Financial Accounting Standards Board (FASB), as part of its simplification initiative, issued two proposed accounting standards updates (ASU) to U.S. generally accepted accounting principles (GAAP) income tax rules — for intraentity asset transfers and balance sheet classification requirements for deferred taxes. The proposals, “IntraEntity Asset Transfers” and “Balance Sheet Classification of Deferred Taxes,” would amend Accounting Standards Codification (ASC) Topic 740 (formerly FAS 109), Income Taxes. The first would require entities to account for the tax effects of an intraentity transfer of assets when the transfer occurs, while the second would require classification of all deferred tax liabilities and assets as noncurrent. If endorsed, the standards would be effective for periods beginning after December 15, 2016, for public business entities; all other entities would have an additional year to adopt the guidance. Early adoption is permitted. In addition to simplifying accounting for income taxes, the proposed updates would align the recognition of income tax consequences of intraentity asset transfers and the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS).

The proposal requires recognition of the current and deferred income tax consequences of an intraentity asset transfer when the transfer occurs, eliminating the exception under current U.S. GAAP prohibiting the recognition of current and deferred income tax consequences for an intraentity asset transfer until the asset or assets have been sold to an outside party. The proposed update results from constituent concerns that the current exception does not provide useful information to financial statement users because it requires deferral of the income tax consequences of an intraentity asset transfer, including income taxes payable or paid. In addition, the exception adds complexity in financial reporting due to the limited amount of authoritative guidance, which leads to diversity in practice.

The proposed update requires an entity to classify all deferred tax assets and liabilities as noncurrent in the statement of financial position. Accordingly, the update only would affect entities presenting a classified statement of financial position. Current accounting guidance requires an entity to separate deferred taxes into two classifications: net current assets or liabilities and net noncurrent assets or liabilities. FASB’s position says presenting deferred tax assets and liabilities in one place, as a noncurrent asset or liability, will not negatively affect the quality of information given to investors. As noted in the Background and Basis for Conclusion: “The Board noted that the classification required by current GAAP does not provide users of financial statements with useful information because the current and noncurrent classification generally does not reflect when a temporary difference will reverse and become a taxable or deductible item.” In addition, FASB noted the predominant deferred tax asset or deferred tax liability often relates to assets and liabilities more associated with noncurrent assets and liabilities, meaning they should remain on the books for more than one reporting period.