FASB Flash Report - October 2016

October 2016

FASB Eliminates Income Tax Deferral for All Intra-Entity Asset Transfers Except Inventory 

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Summary

In October 2016, the FASB issued ASU 2016-16[1] eliminating the existing exception in U.S. GAAP that prohibits the recognition of income tax consequences for most intra-entity asset transfers. However, the exception has been retained for intra-entity asset transfers of inventory only. As a result, entities will now be required to recognize current and deferred income tax consequences of intra-entity asset transfers (other than those of inventory) when the transfer occurs. The new standard takes effect in 2018 for public companies and is available here.


Details

Background
U.S. GAAP generally requires comprehensive recognition of the income tax effects of transactions when they occur, but currently contains an exception to this rule for intra-entity asset transfers.

Main Provisions
ASU 2016-16 eliminates the recognition exception for intra-entity asset transfers other than inventory so that an entity’s consolidated financial statements reflect the current and deferred tax consequences of those intra-entity asset transfers when they occur. For intra-entity asset transfers of inventory, recognition of current and deferred income tax consequences will continue to be deferred until the inventory has been sold to an outside party or otherwise left the consolidated group.

Effective Date and Transition Method
The ASU is effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim reporting periods within those fiscal years, and for entities other than public business entities for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. An entity may elect early adoption, but it must do so for the first interim period of an annual period if it issues interim financial statements. The ASU must be applied on a modified retrospective basis through a cumulative-effect adjustment, including the effect of any resultant valuation allowance, to retained earnings as of the beginning of the period of adoption.
 

For questions related to matters discussed above, please contact Yosef Barbut or Adam Brown.


[1] Intra-Entity Transfers of Assets Other Than Inventory