The Financial Accounting Standards Board has released an
Some of FASB’s stakeholders submitted the idea for the project as part of the board’s simplification initiative for reducing complexity in accounting standards. Under current GAAP, businesses are not supposed to recognize current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Interpretations of the current accounting guidance have developed in practice over the years for transfers of certain intangible and tangible assets, but the prohibition on recognition is an exception to the general principle of comprehensive recognition of current and deferred income taxes under GAAP.
Stakeholders told FASB that the limited amount of authoritative guidance about the exception has led to more diversity in practice and complexity in financial reporting, particularly for intra-entity transfers of intellectual property.
FASB also learned from stakeholders that the exception results in an unfaithful representation of the economics of an intra-entity asset transfer, as it requires deferral of the income tax consequences of the transfer, including income taxes payable or paid.
FASB has decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Thus, the new accounting standards update eliminates the exception for an intra-entity transfer of an asset other than inventory, such as intellectual property and property, plant and equipment. On the basis of the feedback it has received about the anticipated benefits and costs of the update, FASB decided not to change the standards for an intra-entity transfer of inventory.
While the amendments in the update do not include new disclosure requirements, FASB said the 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.
“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,” said FASB.
The board also pointed out that the update aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards. The IFRS standard, IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs.
For public companies, the amendments in the accounting standards update are effective for annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within those annual reporting periods. For other types of entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual periods beginning after Dec. 15, 2019. Early adoption is allowed.
