No. 2015-87
24 November 2015
To the Point
FASB — final guidance
FASB issues final guidance to
simplify one aspect of income tax
accounting
The guidance
requires companies
to classify all
deferred tax assets
and liabilities as
noncurrent on the
balance sheet.
What you need to know
•
The FASB issued final guidance that requires companies to classify all deferred tax
assets and liabilities as noncurrent on the balance sheet instead of separating
deferred taxes into current and noncurrent amounts.
•
Because early adoption is permitted, companies can start applying this guidance in
interim and annual financial statements that have not yet been issued.
•
The FASB staff is performing additional research on a companion proposal that would
eliminate the current exception that requires companies to defer the income tax
effects of certain intercompany transactions.
Overview
The Financial Accounting Standards Board (FASB or Board) issued final guidance 1 that
requires companies to classify all deferred tax assets and liabilities as noncurrent on the
balance sheet instead of separating deferred taxes into current and noncurrent amounts.
Because early adoption is permitted, companies can start applying this guidance in interim
and annual financial statements that have not yet been issued.
The FASB staff is performing additional research on a companion proposal to require companies
to immediately recognize income tax expenses or benefits on intercompany transactions. The
Board asked the staff in October to research the costs and benefits of deferring the income tax
effects only for intercompany inventory transactions.
The project is part of the FASB’s broader simplification initiative to address narrow topics
relatively quickly to reduce the cost and complexity of financial reporting while improving or
maintaining the usefulness of information provided to users of financial statements.
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Key considerations
Companies that present classified balance sheets currently are required to classify deferred tax
assets and liabilities as current or noncurrent, based on how the related assets or liabilities are
classified.2 If a deferred tax asset or liability is not related to an asset or liability for financial
reporting purposes (e.g., a deferred tax asset related to a net operating loss carryforward),
the deferred tax asset or liability is classified as current or noncurrent based on the expected
reversal date of the associated temporary difference. 3
Under the new guidance, companies are required to classify all deferred tax assets and
liabilities as noncurrent. In addition, companies will no longer allocate valuation allowances
between current and noncurrent deferred tax assets because those allowances also will be
classified as noncurrent.
The Board said classifying deferred taxes into current and noncurrent amounts does not
provide users of financial statements with useful information because it generally does not
reflect when the related temporary difference will reverse and become a taxable or deductible
item. The Board acknowledged that classifying all deferred taxes as noncurrent is not pure
conceptually. However, the Board said this simplification will reduce cost and complexity
without decreasing the usefulness of information provided to users.
How we see it
While the guidance changes the way deferred taxes are classified on the balance sheet,
companies are still required to offset deferred tax assets and liabilities for each taxpaying
component within a tax jurisdiction.
Effective date and transition
For public business entities, the guidance is effective for financial statements issued for annual
periods beginning after 15 December 2016 (i.e., 2017 for a calendar-year company), and
interim periods within those annual periods. For all other entities, the guidance is effective for
financial statements issued for annual periods beginning after 15 December 2017 (i.e., 2018
for a calendar-year company), and interim periods within annual periods beginning after
15 December 2018. Early adoption is permitted for all companies in any interim or annual
period. The guidance may be adopted on either a prospective or retrospective basis.
Companies must disclose in the first interim and annual period of adoption the nature of and
reason for the change in accounting principle. If the guidance is adopted on a prospective
basis, a company must also disclose that prior periods were not retrospectively adjusted. If
the guidance is adopted retrospectively, a company must disclose quantitative information
about the effects of the accounting change on prior periods.
Endnotes:
1
2
3
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All Rights Reserved.
SCORE No. BB3100
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Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes.
Accounting Standards Codification (ASC) 740-10-45-4.
ASC 740-10-45-9.
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2 | To the Point FASB issues final guidance to simplify one aspect of income tax accounting 24 November 2015