FASB Voted to Affirm the Proposal to Require Classification of All Deferred Income Taxes as Noncurrent
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On October 5, 2015 the Financial Accounting Standards Board (“FASB” or “Board”) voted to ratify a proposed Accounting Standards Update (“ASU”) requiring presentation of deferred tax assets and liabilities as noncurrent in a classified balance sheet. This accounting principle change will be effective in calendar year 2017 for public entities and calendar year 2018 for non-public entities with calendar year reporting periods. However, early adoption is permitted to any interim or annual period.
The Board has also planned additional research on issues raised by stakeholders concerning a proposed ASU to eliminate the intra-entity asset transfer recognition exception.
Under current accounting, deferred income taxes are presented in a classified balance sheet as “current” and “noncurrent” assets and liabilities, depending on the classification of the underlying asset or liability for which deferred taxes are recognized. Deferred tax assets that are not related to specific assets or liabilities, such as net operating losses, income tax credits and the Alternative Minimum Tax credit carryforwards, are classified based on their expected tax return utilization period.
On January 22, 2015, the Board issued an Exposure Draft (“ED”) of a proposed ASU on income taxes (Topic 740) to require “noncurrent” presentation of all deferred income taxes. The ED was issued as part of the Board’s Simplification Initiative. The majority of the comment letters supported the balance sheet classification proposal.
Stakeholders argued that current classification of deferred taxes provides little or no benefit to financial statement users to justify the complexity and cost of complying with the current classification rules. This is because current classification is not always an accurate estimate of the timing of expected cash tax flows from deferred taxes expected to reverse within the next accounting period. Additionally, the FASB’s decision would result in convergence with IFRS since International Accounting Standard (IAS) 12 on income taxes also requires noncurrent presentation of all deferred income taxes.
Effective Date, Transition Method and Transition Disclosure
Public entities are required to apply the new guidance in the annual reporting period beginning after December 15, 2016, including interim reporting periods within those annual reporting periods. Private entities will have an additional year to apply the change, starting with annual periods beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018.
Early adoption is allowed for all entities as of the beginning of any interim or annual reporting period.
Reporting entities have the choice between applying the amendments prospectively or retrospectively to all periods presented. In case of a prospective application, reporting entities will disclose in the first interim and annual period of change (i) the nature of and reason for the change in accounting principle, and (ii) a statement that prior periods were not adjusted. If the amendments are applied retrospectively, reporting entities have to disclose in the first interim and annual period of change (i) the nature of and reason for the change in accounting principle, and (ii) quantitative information about the effects of the accounting change on prior periods.
Status of the ED Proposed ASU to Eliminate the Recognition Exception for Intra-Entity Asset Transfers
Under current accounting, all current and deferred income tax effects from an intra-entity transfer of assets are deferred in consolidated financial statements until the related asset’s income is recognized. The ED called for eliminating this recognition exception. The majority of comment letters were not in favor of this proposal, arguing the elimination would increase cost and complexity. However, one alternative is to create a scope exception for inventory and remove the recognition exception for all other assets. The Board directed the staff to perform additional research on several issues raised in comment letters (e.g., interim period tax accounting implications from removing the recognition exception) and to research the cost and benefit of creating an inventory scope exception while eliminating the current exception for all other assets.
Entities may consider whether early adopting noncurrent presentation of all deferred income taxes would benefit users of their financial statements and plan their adoption work accordingly. Entities may also consider whether the change in balance sheet presentation would impact certain financial statement measures and ratios used for various purposes and plan appropriate communication.
Stakeholders are also encouraged to participate in any FASB’s staff outreach on issues raised in comment letters and the options considered by the Board concerning the proposal to eliminate the intra-entity transfer recognition exception.
National Assurance Group
For more information, please contact one of the following regional practice leaders:
National Tax Services - Topic 740 Group