FASB Simplifies Tax Accounting for Asset Transfersby
A new standard issued on Oct. 24 by the Financial Accounting Standards Board (FASB) allows entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, is a result of FASB’s simplification initiative to reduce the cost and complexity of financial reporting while improving the usefulness of information reported to investors.
Current US GAAP doesn’t allow the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This is an exception to the principal of comprehensive recognition of current and deferred income taxes.
“Stakeholders informed the board that the limited amount of authoritative guidance about the exception has led to diversity in practice and is a source of complexity in financial reporting, particularly for an intra-entity transfer of intellectual property,” the ASU states. “The board also learned from stakeholders that this exception results in an unfaithful representation of the economics of an intra-entity asset transfer because the exception requires deferral of the income tax consequences of the transfer, including income taxes payable or paid.”
So, the new standard eliminates the exception for an intra-entity transfer of an asset other than inventory. Examples of assets that would be impacted by the new standard include intellectual property and property, plant, and equipment.
“The amendments in this update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory,” the ASU states. “For example, GAAP requires an entity to disclose a comparison of income tax expense (benefit) with statutory expectations (a rate reconciliation for public entities or a description of the nature of each significant reconciling item for nonpublic entities) and also requires an entity to disclose the types of temporary differences and carryforwards that give rise to a significant portion of deferred income taxes.”
After taking into account stakeholder concerns about the anticipated benefits and costs, the FASB decided against changing GAAP for an intra-entity transfer of inventory.
The new standard also aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards.
For public business entities, the amendments go into effect for annual reporting periods beginning after Dec. 15, 2017, including interim periods within those annual reporting periods. For all other entities, the standard goes into effect for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual periods beginning after Dec. 15, 2019.
Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.