Proposed ASU—Income Taxes (Topic 740) - FASB Home ASU_mdash_Income... · Income Taxes (Topic 740)...

Income Taxes (Topic 740)

I. Intra-Entity Asset Transfers File Reference No. 2015-200

II. Balance Sheet Classification of Deferred Taxes File Reference No. 2015-210

The Board issued this Exposure Draft of two proposed Accounting Standards Updates to

solicit public comment on proposed changes to Topic 740 of the FASB Accounting

Standards Codification®. Individuals can submit comments in one of three ways: using the

electronic feedback form on the FASB website, emailing written comments to

[email protected], or sending a letter to “Technical Director, File Reference No. 2015-200

– I and File Reference No. 2015-210 – II, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT

06856-5116.”

Two Proposed Accounting Standards Updates

Issued: January 22, 2015 Comments Due: May 29, 2015

mailto:[email protected]

The FASB Accounting Standards Codification® is the source of authoritative

generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of Two Proposed Accounting Standards Updates

The Board invites comments on all matters in this Exposure Draft and is requesting comments by May 29, 2015. Interested parties may submit comments in one of three ways:

Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment

Emailing a written letter to [email protected], File Reference No. 2015-200 – I, File Reference No. 2015-210 – II

Sending written comments to “Technical Director, File Reference No. 2015-200 – I, File Reference No. 2015-210 – II, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.”

Do not send responses by fax.

All comments received are part of the FASB’s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB’s website.

Copyright © 2015 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: “Copyright © 2015 by Financial Accounting Foundation. All rights reserved. Used by permission.”

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175801893139

mailto:[email protected]

Two Proposed Accounting Standards Updates


January 22, 2015

Comment Deadline: May 29, 2015

CONTENTS

Page Numbers

Intra-Entity Asset Transfers ......................................................................... 1–18

Summary and Questions for Respondents .................................................... 1–3 Amendments to the FASB Accounting Standards Codification

® .................. 5–12

Background Information and Basis for Conclusions .............................. …13–17 Amendments to the XBRL Taxonomy .............................................................. 18

Balance Sheet Classification of Deferred Taxes ...................................... 19–35

Summary and Questions for Respondents ................................................ 21–22 Amendments to the FASB Accounting Standards Codification

® ................ 23–30

Background Information and Basis for Conclusions .............................. …31–34 Amendments to the XBRL Taxonomy .............................................................. 35


Proposed Accounting Standards Update

Intra-Entity Asset Transfers File Reference No. 2015-200

An Amendment of the FASB Accounting Standards Codification®

Financial Accounting Standards Board

1

Summary and Questions for Respondents

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update) and What Are the Main Provisions?

The Board is issuing this proposed Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. This specific area of potential simplification was submitted by stakeholders as part of the Simplification Initiative, and it was the subject of a formal agenda request.

The Board proposes to eliminate the exception in GAAP that prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. Consequently, this proposal requires that an entity recognize the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs.

The guidance on intra-entity asset transfers is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. Stakeholders informed the Board that the limited amount of authoritative guidance about the exception has led to diversity in practice and the exception is a source of complexity in financial reporting. The Board also learned from stakeholders that the exception does not provide useful information to financial statement users because the exception requires deferral of the income tax consequences of an intra-entity asset transfer, including income taxes payable or paid. However, the Board is aware that the amendments in this proposed Update might require an entity to make process and internal control changes and that accounting for income tax consequences when the intra-entity asset transfer occurs might result in the potential for greater volatility in earnings compared with the current accounting.

The proposed Update would align the recognition of income tax consequences of intra-entity asset transfers with International Financial Reporting Standards (IFRS). Specifically, IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity asset transfer when the transfer occurs.

2

What Are the Transition Requirements and When Would the Amendments Be Effective?

For public business entities, the Board expects that the proposed amendments would be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption would not be permitted for public business entities.

For all other entities, the Board expects that the proposed amendments would be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018. Early adoption would be permitted, but not before the effective date for public business entities.

Entities would be required to apply the proposed amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of the income tax consequences of intra-entity asset transfers occurring before the effective date.

Disclosures required at transition would include the nature of and reason for the change in accounting principle, and quantitative information about the effects of the accounting change.

Questions for Respondents

The Board invites individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree. Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning.

Question 1: Should the current and deferred income tax consequences of an intra-entity asset transfer be recognized when the transfer occurs? If not, why?

Question 2: If the income tax consequences should not be recognized when the transfer occurs, should the income taxes payable or paid upon transfer be expensed as incurred? If not, how should income taxes payable or paid be recognized?

Question 3: Should the proposed guidance be applied on a modified retrospective basis? Are the transition disclosures appropriate?

Question 4: Should the amendments in this proposed Update be effective for:

3

a. Public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2016

b. All other entities for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018, with early adoption permitted, but not before the effective date for public business entities?

Question 5: What would be the expected transition costs of adopting the guidance in the proposed Update? What would be the expected recurring costs of applying the proposed guidance compared with the costs of applying current GAAP?

5

Amendments to the FASB Accounting Standards Codification®

Introduction

1. The Accounting Standards Codification is amended as described in paragraphs 2–6. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and

deleted text is struck out.

Amendments to Master Glossary

2. Amend the Master Glossary term Temporary Difference, with a link to transition paragraph 740-10-65-4, as follows:

Temporary Difference

A difference between the tax basis of an asset or liability computed pursuant to the requirements in Subtopic 740-10 for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Paragraph 740-10-25-20 cites eight provides examples of temporary differences. Some temporary differences cannot be identified with a particular asset or liability for financial reporting (see paragraphs 740-10-05-10 and 740-10-25-24 through 25-25), but those temporary differences do meet both of the following conditions:

a. Result from events that have been recognized in the financial statements

b. Will result in taxable or deductible amounts in future years based on provisions of the tax law.

Some events recognized in financial statements do not have tax consequences. Certain revenues are exempt from taxation and certain expenses are not deductible. Events that do not have tax consequences do not give rise to temporary differences.

6

Amendments to Subtopic 740-10

3. Amend paragraphs 740-10-25-3 and 740-10-25-20 through 25-23 and supersede paragraph 740-10-25-55, with a link to transition paragraph 740-10-65-4, as follows:

Income Taxes—Overall

Recognition 740-10-25-1 This Section establishes the recognition requirements necessary to implement the objectives of accounting for income taxes identified in Section

740-10-10. The following paragraph sets forth the basic recognition requirements while paragraph 740-10-25-3 identifies specific, limited exceptions to the basic requirements.

740-10-25-2 Other than the exceptions identified in the following paragraph, the

following basic requirements are applied in accounting for income taxes at the date of the financial statements:

a. A tax liability or asset shall be recognized based on the provisions of this Subtopic applicable to tax positions, in paragraphs 740-10-25-5 through 25-17, for the estimated taxes payable or refundable on tax returns for the current and prior years.

b. A deferred tax liability or asset shall be recognized for the estimated future tax effects attributable to temporary differences and carryforwards.

740-10-25-3 The only exceptions in applying those basic requirements are:

a. Certain exceptions to the requirements for recognition of deferred taxes whereby a deferred tax liability is not recognized for the following types of temporary differences unless it becomes apparent that those temporary differences will reverse in the foreseeable future: 1. An excess of the amount for financial reporting over the tax basis of

an investment in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration. See paragraphs

740-30-25-18 through 25-19 for the specific requirements related to this exception.

2. Undistributed earnings of a domestic subsidiary or a domestic corporate joint venture that is essentially permanent in duration that arose in fiscal years beginning on or before December 15, 1992. A last-in, first-out (LIFO) pattern determines whether reversals pertain to differences that arose in fiscal years beginning on or before December 15, 1992. See paragraphs 740-30-25-18 through 25-19 for the specific requirements related to this exception.

7

3. Bad debt reserves for tax purposes of U.S. savings and loan associations (and other qualified thrift lenders) that arose in tax years beginning before December 31, 1987. See paragraphs 942-740-25-1 through 25-3 for the specific requirements related to this exception.

4. Policyholders’ surplus of stock life insurance entities that arose in fiscal years beginning on or before December 15, 1992. See paragraph 944-740-25-2 for the specific requirements related to this exception.

b. Recognition of temporary differences related to deposits in statutory reserve funds by U.S. steamship entities (see paragraph 995-740-25-2)

c. The pattern of recognition of after-tax income for leveraged leases or the allocation of the purchase price in a purchase business combination to acquired leveraged leases as required by Subtopic 840-30

d. A prohibition on recognition of a deferred tax liability related to goodwill (or the portion thereof) for which amortization is not deductible for tax purposes (see paragraph 805-740-25-3)

e. Subparagraph superseded by Accounting Standards Update 2015-XX. A prohibition on recognition of a deferred tax asset for the intra-entity difference between the tax basis of the assets in the buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements. Income taxes paid on intra-entity profits on assets remaining within the group are accounted for under the requirements of Subtopic 810-10.

f. A prohibition on recognition of a deferred tax liability or asset for differences related to assets and liabilities that, under Subtopic 830-10, are remeasured from the local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes. See Subtopic 830-740 for guidance on foreign currency related income taxes matters.

740-10-25-20 An assumption inherent in an entity’s statement of financial

position prepared in accordance with generally accepted accounting principles (GAAP) is that the reported amounts of assets and liabilities will be recovered and settled, respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and its reported amount in the statement of financial position will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. Examples include the following:

8

a. Revenues or gains that are taxable after they are recognized in financial income. An asset (for example, a receivable from an installment sale) may be recognized for revenues or gains that will result in future taxable amounts when the asset is recovered.

b. Expenses or losses that are deductible after they are recognized in financial income. A liability (for example, a product warranty liability) may be recognized for expenses or losses that will result in future tax deductible amounts when the liability is settled.

c. Revenues or gains that are taxable before they are recognized in financial income. A liability (for example, subscriptions received in advance) may be recognized for an advance payment for goods or services to be provided in future years. For tax purposes, the advance payment is included in taxable income upon the receipt of cash. Future sacrifices to provide goods or services (or future refunds to those who cancel their orders) will result in future tax deductible amounts when the liability is settled.

d. Expenses or losses that are deductible before they are recognized in financial income. The cost of an asset (for example, depreciable personal property) may have been deducted for tax purposes faster than it was depreciated for financial reporting. Amounts received upon future recovery of the amount of the asset for financial reporting will exceed the remaining tax basis of the asset, and the excess will be taxable when the asset is recovered.

e. A reduction in the tax basis of depreciable assets because of tax credits. Amounts received upon future recovery of the amount of the asset for financial reporting will exceed the remaining tax basis of the asset, and the excess will be taxable when the asset is recovered. For example, a tax law may provide taxpayers with the choice of either taking the full amount of depreciation deductions and a reduced tax credit (that is, investment tax credit and certain other tax credits) or taking the full tax credit and a reduced amount of depreciation deductions.

f. Investment tax credits accounted for by the deferral method. Under the deferral method as established in paragraph 740-10-25-46, investment tax credits are viewed and accounted for as a reduction of the cost of the related asset (even though, for financial statement presentation, deferred investment tax credits may be reported as deferred income). Amounts received upon future recovery of the reduced cost of the asset for financial reporting will be less than the tax basis of the asset, and the difference will be tax deductible when the asset is recovered.

g. An increase in the tax basis of assets because of indexing whenever the local currency is the functional currency. The tax law for a particular tax jurisdiction might require adjustment of the tax basis of a depreciable (or other) asset for the effects of inflation. The inflation-adjusted tax basis of the asset would be used to compute future tax deductions for

9

depreciation or to compute gain or loss on sale of the asset. Amounts received upon future recovery of the local currency historical cost of the asset will be less than the remaining tax basis of the asset, and the difference will be tax deductible when the asset is recovered.

h. Business combinations and combinations accounted for by not-for-profit entities (NFPs). There may be differences between the tax bases

and the recognized values of assets acquired and liabilities assumed in a business combination. There also may be differences between the tax bases and the recognized values of assets acquired and liabilities assumed in an acquisition by a not-for-profit entity or between the

tax bases and the recognized values of the assets and liabilities carried over to the records of a new entity formed by a merger of not-for-profit entities. Those differences will result in taxable or deductible amounts

when the reported amounts of the assets or liabilities are recovered or settled, respectively.

i. The difference between the tax basis of the asset in the buyer’s tax jurisdiction and the cost of the asset reported in the consolidated financial statements as a result of an intra-entity asset transfer from one taxpaying entity to another taxpaying entity of the same consolidated group.

740-10-25-21 The examples in (a) through (d) in the preceding paragraph

illustrate revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in which they are recognized in pretax financial income. Those differences between taxable income and pretax financial income also create differences (sometimes accumulating over more than one year) between the tax basis of an asset or liability and its reported amount in the financial statements. The examples in (e) through (i) (h) in the preceding paragraph illustrate other events that create differences between the tax basis of an asset or liability and its reported amount in the financial statements. For all eightof the examples, the differences result in taxable or deductible amounts when the reported amount of an asset or liability in the financial statements is recovered or settled, respectively.

740-10-25-22 This Topic refers collectively to the types of differences illustrated

by those eight the examples in paragraph 740-10-25-21 and to the ones described in paragraph 740-10-25-24 as temporary differences.

740-10-25-23 Temporary differences that will result in taxable amounts in future

years when the related asset or liability is recovered or settled are often referred to as taxable temporary differences (the examples in paragraph 740-10-25-20(a); (d); and (e) are taxable temporary differences). Likewise, temporary differences that will result in deductible amounts in future years are often referred to as deductible temporary differences (the examples in paragraph 740-10-25-20(b); (c); (f); and (g) are deductible temporary differences). Business combinations and intra-entity asset transfers (the example examples in paragraph 740-10-25-20(h) through (i)) may give rise to both taxable and deductible temporary differences.

10

740-10-25-24 Some temporary differences are deferred taxable income or tax

deductions and have balances only on the income tax balance sheet and therefore cannot be identified with a particular asset or liability for financial reporting.

740-10-25-55 Paragraph superseded by Accounting Standards Update 2015-XX.

In the event that an entity purchases tax benefits that result from intra-entity transactions between members of a consolidated entity, paragraph 740-10-25-3(e), which prohibits recognition of a deferred tax asset for the difference between the tax basis of assets in the buyer’s tax jurisdiction and the cost of those assets as reported in the consolidated financial statements, shall be applied.

4. Amend paragraph 740-10-55-203, with a link to transition paragraph 740-10-65-4, as follows:

Implementation Guidance and Illustrations

> Illustrations

> > Example 26: Direct Transaction with Governmental Taxing Authority

740-10-55-203 In this Example, tax laws in a foreign country enable corporate

taxpayers to elect to step up the tax basis for certain fixed assets ($1,000,000) to fair value ($2,000,000) in exchange for a current payment to the government of 3 percent of the step-up ($30,000). An entity would be expected to avail itself of this election (and make the upfront payment) as long as it believed that it was likely that it would be able to utilize the additional deductions (at a tax rate of 35 percent) that were created as a result of the step-up to reduce future taxable income and that the timing and amount of the resulting future tax savings justified the current payment. (For purposes of this Example, it is assumed that the transaction that accomplishes this step-up for tax purposes does not create a taxable temporary difference difference and is not an intra-entity transaction as discussed in paragraph 740-10-25-3(e). A taxable temporary difference would exist, for example, if the tax benefit associated with the transaction with the governmental taxing authority becomes taxable in certain situations, such as those described in paragraph 830-740-25-7).

11

5. Add paragraph 740-10-65-4 and its related heading, as follows:

> Transition Related to Accounting Standards Update No. 2015-XX, Income Taxes (Topic 740): Intra-Entity Asset Transfers

740-10-65-4 The following represents the transition and effective date information related to Accounting Standards Update No. 2015-XX, Income Taxes (Topic 740): Intra-Entity Asset Transfers:

a. For public business entities, the pending content that links to this

paragraph shall be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016.

b. For public business entities, early application of the pending content that links to this paragraph is not permitted.

c. For entities other than public business entities, the pending content that links to this paragraph shall be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018.

d. For entities other than public business entities, early application of the pending content that links to this paragraph is permitted, but not before the effective date for public business entities. If an entity other than a public business entity elects to early adopt the pending content that links to this paragraph, it also must elect to early adopt the pending content that links to paragraph 740-10-65-5.

e. The pending content that links to this paragraph shall be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of the income tax consequences of intra-entity asset transfers occurring before the effective date.

f. In the first annual period after adoption, and the interim periods within that first annual period, a public business entity shall disclose the following: 1. The nature of and reason for the change in accounting principle 2. The effect of the change on income from continuing operations, net

income (or other appropriate captions of changes in the applicable net assets or performance indicator), any other affected financial statement line item(s), and any affected per-share amounts for the current period

3. The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the period of adoption.

g. All other entities shall make the disclosures in (f) in the first annual period after the entity’s adoption date, unless the entity elects to early adopt the pending content that links to this paragraph in an interim period, in which case the entity also shall make those disclosures in the

12

interim periods within the first annual period after the entity’s adoption date.


6. Supersede paragraph 810-10-45-8, with a link to transition paragraph 740-10-65-4, as follows:

Consolidation—Overall

Other Presentation Matters 810-10-45-8 Paragraph superseded by Accounting Standards Update 2015-XX.

If income taxes have been paid on intra-entity profits on assets remaining within the consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be appropriately reduced. The amendments in this proposed Update were approved for publication by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Russell G. Golden, Chairman James L. Kroeker, Vice Chairman Daryl E. Buck Thomas J. Linsmeier R. Harold Schroeder Marc A. Siegel Lawrence W. Smith

13

Background Information and Basis for Conclusions

Introduction

BC1. The following summarizes the Board’s considerations in reaching the conclusions in this proposed Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC2. The Board is issuing this proposed Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of the financial statements. This specific area of potential simplification was submitted by stakeholders as part of the Simplification Initiative, and it was the subject of a formal agenda request.

Recognition

BC3. The Board proposes to eliminate the exception in GAAP that prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. Consequently, the Board has concluded in this proposed Update that an entity would be required to recognize the current and deferred income taxes of an intra-entity asset transfer when the transfer occurs.

BC4. Under current GAAP, the selling entity defers recognizing, for financial reporting purposes, any tax expense resulting from an intra-entity asset transfer, including taxes currently payable or paid. The buying entity does not recognize deferred income taxes for any basis differences for the transferred asset. This is an exception to the accounting model for comprehensive recognition of income taxes in Topic 740.

BC5. The Board supports eliminating the exception because recognizing the income tax consequences of an intra-entity asset transfer when the transfer occurs is more representationally faithful than current GAAP, which requires deferral of the income tax consequences, including the income taxes paid or payable in the selling entity’s tax jurisdiction. An intra-entity sale of inventory or other assets between affiliated entities in different tax jurisdictions involves two unrelated third parties—the selling entity’s taxing authority and the buying entity’s taxing authority. Intra-entity asset transfers between tax jurisdictions are often

14

taxable events with current and deferred income tax consequences. Therefore, it is appropriate to recognize the income tax consequences when the intra-entity asset transfer occurs despite the requirement in GAAP to defer the intra-entity pre-tax profit because that profit results from a transaction within the same consolidated group.

BC6. The Board supports eliminating the exception because it would simplify the model for accounting for income taxes. The application of the exception is a source of complexity in financial reporting because there is limited guidance on when and how to apply the exception. This has led to diversity in practice in the application of the exception. Eliminating the exception would eliminate the diversity in practice. Current accounting also results in recognizing an asset in the form of a deferred charge for income taxes paid by the selling entity to the taxing authority in its jurisdiction. Some Board members do not think there is a conceptual basis for recognizing an asset for those income taxes paid. This amendment would eliminate the need to (a) identify and track the deferred charge for income taxes paid or payable to the selling entity’s tax jurisdiction, (b) decide when to recognize the deferred charge in the income statement, and (c) assess the deferred charge for impairment. The Board noted that eliminating the exception would require an entity to recognize deferred income taxes and that there is a cost of recognizing and measuring those deferred income taxes. However, the Board believes the cost of applying current GAAP might be equal to or higher than the cost of applying the proposed amendments.

BC7. The Board indicated that recognizing current income taxes paid or payable in the period in which an intra-entity transfer occurs would be helpful to users of financial statements in comparing current income tax expense and the effective tax rate to cash paid for income taxes.

BC8. The Board noted that eliminating the exception would align the recognition of income tax consequences of intra-entity asset transfers with the recognition of income taxes in IFRS. Specifically, IAS 12 requires recognition of current and deferred income taxes resulting from an intra-entity asset transfer when the transfer occurs.

BC9. The Board considered retaining the exception that requires both the buyer and the seller to defer the recognition of income tax consequences of intra-entity asset transfers, and providing additional guidance on the scope of qualifying transactions included in the exception and guidance on when the income tax consequences are recognized for certain types of intra-entity asset transfers, such as sales of intellectual property. However, the Board rejected this alternative because adding guidance to an exception that is a source of complexity in financial reporting most likely would not reduce complexity in financial reporting. Additionally, the Board rejected this alternative because it observed that the proposed amendments would result in users of financial statements receiving more useful information.

15

Disclosure

BC10. The Board decided not to propose changes to the existing disclosure requirements for income taxes in this proposed Update because (a) current GAAP includes disclosure requirements that provide users of financial statements with information about the effects of significant intra-entity asset transfers and (b) as part of the project on disclosure framework, the Board is evaluating income tax disclosures more broadly than the issue addressed in this proposed Update.

BC11. Topic 740 requires an entity to compare income tax expense (benefit) with statutory expectations. A public entity is required to disclose a numeric reconciliation, and a nonpublic entity is required to disclose the nature of significant reconciling items. The tax effects of significant intra-entity asset transfers would be apparent in those disclosures.

BC12. Topic 740 also requires an entity to disclose the types of temporary differences and carryforwards that give rise to a significant portion of deferred income taxes. A public entity is required to disclose the approximate tax effects of each type of temporary difference and carryforward that gives rise to a significant portion of deferred income taxes, and a nonpublic entity is required to disclose the types of significant temporary differences and carryforwards. The tax effects of significant intra-entity asset transfers would be apparent in those disclosures.

Effective Date and Transition

BC13. The Board expects that the effective date would be the same for both of the proposed Updates in this Exposure Draft. For public business entities, the Board expects that the proposed amendments would be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. For all other entities, the proposed amendments would be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018.

BC14. The final effective date will depend on feedback from stakeholders on the amendments in this proposed Update and the issuance date of a final Accounting Standards Update.

BC15. The Board decided that entities other than public business entities would be allowed to adopt the new guidance early, but not before the effective date for public business entities. If an entity other than a public business entity elects early adoption, it would be required to do so for both of the proposed Updates in this Exposure Draft.

16

BC16. The Board decided that an entity would be required to apply the proposed amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of income tax consequences of intra-entity asset transfers occurring before the effective date of the new guidance. The Board decided that the benefits of requiring or permitting retrospective application of the guidance would not justify the costs. Additionally, retrospective application might require the use of hindsight, which would reduce some of the benefits of restating prior periods.

BC17. The Board considered prospective application of the guidance but rejected this transition method because income tax consequences related to certain prior period intra-entity asset transfers may continue to be unrecognized for a significant period of time because those assets could remain in the consolidated group indefinitely. The Board thought this transition approach could be confusing for financial statements users.

BC18. The Board decided that disclosures required at transition would include (a) the nature of and reason for the change in accounting principle and (b) certain quantitative information about the effects of the accounting change.

Benefits and Costs

BC19. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.

BC20. The amendments in this proposed Update would reduce costs for some entities. Application of current GAAP necessitates that entities identify and track income taxes paid by the selling entity and recognize those income taxes as a deferred charge on the statement of financial position until the asset is sold to an outside party. The costs associated with this tracking would be eliminated under the proposed amendments because the income taxes that a selling entity paid would be recognized in the income statement at the time the intra-entity asset transfer occurs.

17

BC21. Furthermore, there is limited guidance on how and when to apply the exception. The costs associated with the application of the exception with limited guidance would be eliminated under the proposed amendments.

BC22. The amendments in this proposed Update would not be expected to result in a significant cost reduction for all entities. There could be incremental costs for some entities associated with recognizing and measuring deferred income taxes resulting from intra-entity asset transfers.

BC23. The amendments in this proposed Update would provide users of financial statements with more useful and transparent information through increased consistency of accounting for income tax consequences for all types of intra-entity asset transfers when the transfer occurs. The change would address the absence of current guidance on how to account for the deferred charge after initial recognition. Additionally, the proposed amendments are more consistent with the recognition of other temporary differences in Topic 740. The proposed amendments also would align the recognition of income tax consequences of intra-entity asset transfers with the recognition of income taxes in IFRS.

18

Amendments to the XBRL Taxonomy

The provisions of this Exposure Draft, if finalized as proposed, would require changes to the U.S. GAAP Financial Reporting Taxonomy (Taxonomy). We welcome comments on these proposed changes to the Taxonomy through ASU Taxonomy Changes provided at www.fasb.org. After the FASB has completed its deliberations and issued a final Accounting Standards Update, proposed amendments to the Taxonomy will be made available for public comment at www.fasb.org and finalized as part of the annual release process.



http://www.fasb.org/


19

Proposed Accounting Standards Update

Balance Sheet Classification of Deferred Taxes File Reference No. 2015-210

An Amendment of the FASB Accounting Standards Codification®

Financial Accounting Standards Board


21

Summary and Questions for Respondents

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update) and What Are the Main Provisions?

The Board is issuing this proposed Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.

The proposed guidance would affect only entities that present a classified statement of financial position. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Stakeholders informed the Board that the requirement results in little or no benefit to users of financial statements because the classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. In addition, there are costs for an entity to separate deferred income tax liabilities and assets into a current and noncurrent amount.

To simplify the presentation of deferred income taxes, the Board proposes that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The proposed guidance would not amend the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount.

The proposed Update would align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards. Specifically, IAS 1, Presentation of Financial Statements, requires deferred tax assets and

liabilities to be classified as noncurrent in a classified statement of financial position.

What Are the Transition Requirements and When Would the Amendments Be Effective?

For public business entities, the Board expects that the proposed amendments would be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption would not be permitted for public business entities.

22

For all other entities, the Board expects that the proposed amendments would be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018. Early adoption would be permitted, but not before the effective date for public business entities.

Entities would be required to apply the proposed amendments prospectively to all deferred income tax liabilities and assets. Disclosures required at transition would include the nature of and reason for the change in accounting principle and a statement that prior periods were not restated.

Questions for Respondents

The Board invites individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree. Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning.

Question 1: Should all deferred income tax liabilities and assets be presented as noncurrent in a classified statement of financial position? If not, why, and what alternatives should the Board consider, and what is the conceptual basis for the alternatives?

Question 2: Should the proposed guidance be applied on a prospective basis?

Question 3: Should the amendments in this proposed Update be effective for:

a. Public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2016

b. All other entities for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018, with early adoption permitted, but not before the effective date for public business entities?

Question 4: What would be the expected transition costs of adopting the guidance in the proposed Update? What would be the expected recurring costs of applying the proposed guidance compared with the costs of applying current GAAP?

23

Amendments to the FASB Accounting Standards Codification®

Introduction

1. The Accounting Standards Codification is amended as described in paragraphs 2–4. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and

deleted text is struck out.


2. Amend paragraphs 740-10-45-4 and 740-10-45-6 and supersede paragraphs 740-10-45-5 and 740-10-45-7 through 45-10 and their related headings, with a link to transition paragraph 740-10-65-5, as follows:

Income Taxes—Overall

Other Presentation Matters

> > Deferred Tax Accounts

740-10-45-4 In a classified statement of financial position, an entity shall

separate classify deferred tax liabilities and assets into a current amount and a as noncurrent amounts amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. 740-10-45-5 Paragraph superseded by Accounting Standards Update 2015-XX. The valuation allowance for a particular tax jurisdiction shall be allocated

between current and noncurrent deferred tax assets for that tax jurisdiction on a pro rata basis.

740-10-45-6 For a particular tax-paying component of an entity and within a

particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and

presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.

24

> > > Deferred Tax Accounts Related to an Asset or Liability

740-10-45-7 Paragraph superseded by Accounting Standards Update 2015-XX. A deferred tax liability or asset for a temporary difference that is related to an

asset or liability shall be classified as current or noncurrent based on the classification of the related asset or liability.


A temporary difference is related to an asset or liability if reduction of the asset or liability causes the temporary difference to reverse. As used here, the term reduction includes amortization, sale, or other realization of an asset and amortization, payment, or other satisfaction of a liability. > > > Deferred Tax Accounts Not Related to an Asset or Liability


A deferred tax liability or asset that is not related to an asset or liability for financial reporting (see paragraphs 740-10-25-24 through 25-26), including deferred tax assets related to carryforwards, shall be classified according to the

expected reversal date of the temporary difference.


A deferred tax liability or asset for a temporary difference may not be related to an asset or liability because there is no associated asset or liability or reduction of an associated asset or liability will not cause the temporary difference to reverse. The classification required by the preceding paragraph disregards any additional temporary differences that may arise and is based on the criteria used for classifying other assets and liabilities.

3. Amend paragraphs 740-10-55-1 through 55-2, 740-10-55-15, and 740-10-55-63 and supersede paragraphs 740-10-55-77 through 55-78 and their related headings and 740-10-55-205 through 55-211 and their related headings, with a link to transition paragraph 740-10-65-5, as follows:

Implementation Guidance and Illustrations

General

740-10-55-1 This Section is an integral part of the requirements of this Subtopic.

This Section provides additional guidance and illustrations that address the application of accounting requirements to specific aspects of accounting for income taxes, including the statement of financial position classification of

deferred tax accounts and disclosures. The guidance and illustrations that follow, unless stated otherwise, assume that the tax law requires offsetting net deductions in a particular year against net taxable amounts in the 3 preceding years and then in the 15 succeeding years. These assumptions about the tax law are for illustrative purposes only. This Subtopic requires that the enacted tax law

25

for a particular tax jurisdiction be used for recognition and measurement of deferred tax liabilities and assets.

> Implementation Guidance

740-10-55-2 The following guidance is organized as follows in three categories:

a. Application of accounting requirements for income taxes to specific situations

b. Subparagraph superseded by Accounting Standards Update 2015-XX. Statement of financial position classification of deferred income taxes

c. Income tax related disclosures.

> > Application of Accounting Requirements for Income Taxes to Specific Situations

> > > The Need to Schedule Temporary Difference Reversals

740-10-55-15 Reversal patterns of existing temporary differences may need to

be scheduled under the requirements of this Subtopic as follows:

a. Subparagraph superseded by Accounting Standards Update 2015-XX. Deferred taxes are classified as current or noncurrent based on the classification of the related asset or liability. Therefore, scheduling is required only for deferred taxes not related to a specific asset or liability.

b. Deferred tax assets are recognized without reference to offsetting, and then an assessment is made about the need for a valuation allowance. Paragraph 740-10-30-18 lists four possible sources of taxable income that may be available to realize such deferred tax assets. In many cases it may be possible to determine without scheduling that expected future taxable income (see paragraph 740-10-30-18(b)) will be adequate to eliminate the need for a valuation allowance. Disclosure of the amounts and expiration dates (or a reasonable aggregation of expiration dates) of operating loss and tax credit carryforwards is required only on a tax basis and does not require scheduling.

c. The adoption of a tax rate convention for measuring deferred taxes when graduated tax rates are a significant factor will, in many cases, eliminate the need for the scheduling. In addition, alternative minimum tax rates and laws are a factor only in considering the need for a

valuation allowance for a deferred tax asset for alternative minimum tax credit carryforwards. When there is a phased-in change in tax rates, however, scheduling will often be necessary. See paragraphs 740-10-55-24; 740-10-55-31 through 55-33; and Examples 14 through 16 (paragraphs 740-10-55-129 through 55-138).

26

> > > Examples of Temporary Differences

740-10-55-63 The Omnibus Budget Reconciliation Act of 1987 requires family-

owned farming businesses to use the accrual method of accounting for tax purposes. The initial catch-up adjustment to change from the cash to the accrual method of accounting is deferred. It is included in taxable income if the business ceases to be family-owned (for example, it goes public). It also is included in taxable income if gross receipts from farming activities in future years drop below certain 1987 levels as set forth in the tax law. The deferral of the initial catch-up adjustment for that change in accounting method for tax purposes gives rise to a temporary difference because an assumption inherent in an entity’s statement of financial position is that the reported amounts of assets and liabilities will be recovered and settled. Under the requirements of this Topic, deferred tax liabilities may not be eliminated or reduced because an entity may be able to delay the settlement of those liabilities by delaying the events that would cause taxable temporary differences to reverse. Accordingly, the deferred tax liability is recognized. If the events that trigger the payment of the tax are not expected in the foreseeable future, the reversal pattern of the related temporary difference is indefinite and the deferred tax liability should be classified as noncurrent.

> > Statement of Financial Position Classification of Deferred Income Taxes

> > > Accounting Change for Tax Purposes


The deferred tax liability or asset associated with an accounting change for tax purposes would be classified like the associated asset or liability if reduction of that associated asset or liability will cause the temporary difference to reverse. If there is no associated asset or liability or if the temporary difference will reverse only over a period of time, the deferred tax liability or asset would be classified based on the expected reversal date of the specific temporary difference. Example 27 (see paragraph 740-10-55-205) illustrates this guidance.

> > > Method of Reporting Construction Contracts Differs for Tax and Book

740-10-55-78 Paragraph superseded by Accounting Standards Update 2015-XX. An entity reports revenue on contracts with customers using a measure of

progress to depict performance over time in accordance with the guidance in paragraphs 606-10-25-31 through 25-37 and paragraphs 606-10-55-16 through 55-21 for financial reporting that is different from the recognition pattern used for tax purposes (for example, when the contract is completed). The temporary differences do not relate to an asset or liability that appears on the entity’s statement of financial position; the temporary differences will only reverse when the contracts are completed. Receivables or contract assets that result from

progress billings can be collected with no effect on the temporary differences; likewise, contract retentions can be collected with no effect on the temporary differences, and the temporary differences will reverse when the contracts are

27

deemed to be complete even if there is a waiting period before retentions will be received. Accordingly, the entity would classify the deferred tax liability based on the estimated reversal of the related temporary differences. Deferred tax liabilities related to temporary differences that will reverse within the same time period used in classifying other contract-related assets and liabilities as current (for example, an operating cycle) would be classified as current.

> Illustrations

> > Example 27: Accounting Change for Tax Purposes

740-10-55-205 Paragraph superseded by Accounting Standards Update 2015-

XX. This Example illustrates the statement of financial position classification guidance in 740-10-55-77 for certain types of deferred income taxes but does not encompass all possible circumstances.


XX. An entity changes its method of handling bad debts for tax purposes from the cash method to the reserve method. Ten percent of the effect of the change at the beginning of calendar year 19X1 will be included as a deduction from taxable income each year for 10 years. The entity uses a one-year time period as the basis for classifying current assets and current liabilities on its statement of financial position. At December 31, 19X1, the amount of the effect of the change that is yet to be included as a deduction from taxable income and the balance of the related deferred income taxes are as follows.

Amount of the effect of the change that is yet to be included as a deduction from taxable income (9/10 of total effect of the change)

$5,125,000

Deferred tax asset (40 percent is the enacted tax rate - no valuation allowance deemed necessary)

$2,050,000


XX. The deferred tax asset does not relate to trade receivables or provisions for doubtful accounts because collection or write-off of the receivables will not cause the temporary differences to reverse; the temporary differences will reverse over time. Accordingly, the entity would classify the deferred tax asset based on the scheduled reversal of the related temporary differences. One-ninth of the remaining temporary differences are scheduled to reverse in 19X2, so one-ninth of the related deferred tax asset would be classified as current at December 31, 19X1 ($227,778).

28

> > Example 28: Unremitted Earnings of Foreign Subsidiaries


XX. This Example illustrates the statement of financial position classification guidance in Section 740-10-45 for certain types of deferred income taxes but does not encompass all possible circumstances.


XX. An entity provides U.S. income taxes on the portion of its unremitted foreign earnings that are not considered to be permanently reinvested in its consolidated foreign subsidiary. The foreign earnings are included in U.S. taxable income in the year in which dividends are paid. The entity uses a one-year time period as the basis for classifying current assets and current liabilities on its statement of financial position. At December 31, 19X1, the accumulated amount of unremitted earnings on which taxes have been provided and the balance of the related deferred income taxes are as follows.

Accumulated unremitted earnings on which taxes have been provided:

Expected to be remitted within one year $9,800,000 Not expected to be remitted within one year 2,700,000

Total $12,500,000

Accumulated deferred tax liability related to unremitted earnings $1,250,000


XX. The deferred tax liability does not relate to an asset or liability on the consolidated statement of financial position; the temporary difference will only reverse when the unremitted earnings are received from the foreign subsidiary by the parent. A payment between consolidated affiliates does not change the consolidated statement of financial position, so no item on the consolidated statement of financial position would be liquidated. Unremitted earnings expected to be remitted within the next year represent 78 percent of the total unremitted earnings for which tax has been provided ($9,800,000/$12,500,000). Therefore, 78 percent of the related deferred tax liability would be classified as current on the consolidated statement of financial position ($975,000).


XX. If the subsidiary were accounted for on the equity method rather than consolidated (for example, a subsidiary reported on the equity method in separate parent entity financial statements), the deferred income taxes would relate to the recorded investment in the subsidiary. The payment of dividends that causes the reversal of the temporary difference would be accompanied by a reduction of the recorded investment in the subsidiary. Therefore, the deferred

29

tax liability would be classified the same as the related investment in the subsidiary.

4. Add paragraph 740-10-65-5 and its related heading, as follows:

> Transition Related to Accounting Standards Update No. 2015-XX, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

740-10-65-5 The following represents the transition and effective date information related to Accounting Standards Update No. 2015-XX, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes:

a. For public business entities, the pending content that links to this

paragraph shall be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016.

b. For public business entities, early application of the pending content that links to this paragraph is not permitted.

c. For entities other than public business entities, the pending content that links to this paragraph shall be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018.

d. For entities other than public business entities, early application of the pending content that links to this paragraph is permitted, but not before the effective date for public business entities. If an entity other than a public business entity elects to early adopt the pending content that links to this paragraph, it also must elect to early adopt the pending content that links to paragraph 740-10-65-4.

e. The pending content that links to this paragraph shall be applied prospectively to all deferred tax liabilities and assets.

f. In the first interim and annual period of adoption, a public business entity shall disclose the following: 1. The nature of and reason for the change in accounting principle 2. A statement that prior periods were not restated.

g. All other entities shall make the disclosures in (f) in the first annual period after the entity’s adoption date, unless the entity elects to early adopt the pending content that links to this paragraph in an interim period, in which case the entity also shall make those disclosures in the interim periods within the first annual period after the entity’s adoption date.

30

The amendments in this proposed Update were approved for publication by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Russell G. Golden, Chairman James L. Kroeker, Vice Chairman

Daryl E. Buck Thomas J. Linsmeier R. Harold Schroeder Marc A. Siegel Lawrence W. Smith

31

Background Information and Basis for Conclusions

Introduction

BC1. The following summarizes the Board’s considerations in reaching the conclusions in this proposed Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC2. The Board is issuing this proposed Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of the financial statements.

Presentation

BC3. To simplify the presentation of deferred income taxes, the Board proposes that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments would eliminate the guidance in Topic 740 that requires an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified statement of financial position. The proposed guidance would have no effect on entities that do not present a classified statement of financial position.

BC4. Under current GAAP, in a classified statement of financial position, deferred tax liabilities and assets are separated into a current amount and a noncurrent amount on the basis of the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. The Board noted that the classification required by current GAAP does not provide users of financial statements with useful information because the current and noncurrent classification generally does not reflect when a temporary difference will reverse and become a taxable or deductible item. Therefore, the classification requirements under current GAAP create unnecessary cost and complexity.

BC5. The Board considered an alternative to require entities to separate deferred tax liabilities and assets into a current amount and a noncurrent amount on the basis of the estimated timing of reversal of the temporary differences.

32

Some Board members noted that this alternative might provide more useful information than either current GAAP or the amendments in this proposed Update because the classification would be based on when the temporary difference is expected to reverse. However, other Board members observed that the reversal of a temporary difference does not necessarily equate to a cash inflow or outflow at the time of the reversal. For example, a deferred tax asset that exists at the end of an annual reporting period might be expected to reverse in the next 12 months, but the reversal might result in the recognition of a different deferred tax asset (for example, a net operating loss carryforward) or an income tax receivable. Furthermore, those Board members observed that determining when a temporary difference is expected to reverse might not be practical for many types of temporary differences. Because this alternative would increase cost and complexity compared with both current GAAP and the amendments in this proposed Update and because of the limitations of the usefulness of the information, the Board decided not to pursue this alternative.

BC6. To meet the objective of simplifying the presentation of deferred income taxes, the Board decided to require noncurrent classification of all deferred tax liabilities and assets in a classified statement of financial position. The Board acknowledges that the proposed noncurrent classification for all deferred tax liabilities and assets is not conceptually pure. However, this simplification would reduce cost and complexity without decreasing the usefulness of information provided to users of financial statements. In addition, the Board noted that the income taxes disclosures are being evaluated as part of the project on disclosure framework and that project could be a better place in which to consider whether there is enhanced information that could be provided to users that cannot be adequately communicated through classification.

Disclosure

BC7. The Board decided not to propose changes to the existing disclosure requirements for income taxes in this proposed Update because (a) current GAAP includes disclosure requirements that provide users of financial statements with information about deferred tax liabilities and assets and (b) as part of the project on disclosure framework, the Board is evaluating income taxes disclosures more broadly than the issue addressed in this proposed Update.

Effective Date and Transition

BC8. The Board expects that the effective date would be the same for both of the proposed amendments contained in this Exposure Draft. For public business entities, the Board expects that the proposed amendments would be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. For all other entities, the proposed amendments would

33

be effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 15, 2018.

BC9. The Board considered requiring the same effective date for all entities because the proposed amendments are not expected to be costly to apply. However, it decided to align the effective date of this proposed Update with the other proposed Update in this Exposure Draft.

BC10. The final effective date will depend on feedback from stakeholders on the amendments in this proposed Update and the issuance date of a final Accounting Standards Update.

BC11. The Board decided that entities other than public business entities would be allowed to adopt the new guidance early, but not before the effective date for public business entities. If an entity other than a public business entity elects early adoption, it would be required to do so for both of the proposed Updates.

BC12. The Board decided that an entity would be required to apply the proposed amendments prospectively. The Board considered requiring retrospective application of the amendments but decided that the benefits did not justify the costs. To apply the amendments retrospectively, an entity would need to reperform its jurisdictional netting to determine the appropriate deferred tax totals. Because the Board thinks that neither the current nor the proposed classification of deferred tax liabilities and assets provides useful information, the Board concluded that there was little to no benefit of retrospective application and there would be costs to restate prior periods.

BC13. The Board decided that disclosures required at transition would include the nature of and reason for the change in accounting principle and a statement that prior periods were not restated.

Benefits and Costs

BC14. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.

34

BC15. The amendments in this proposed Update would reduce cost and complexity because entities no longer would be required to separate deferred tax liabilities and assets into a current and noncurrent amount. This would eliminate the need for an entity to analyze whether deferred tax items are related to specific assets or liabilities for financial reporting and determine the corresponding classification of those specific assets or liabilities. The proposed amendments also would eliminate the need to estimate the timing of reversal of temporary differences for classification in situations in which a deferred tax liability or asset is not related to an asset or liability for financial reporting.

BC16. Furthermore, the classification required by current GAAP does not provide users of financial statements with useful information. This simplification would decrease the cost and complexity in current GAAP without decreasing the usefulness of information provided to users of financial statements.

35

Amendments to the XBRL Taxonomy

The provisions of this Exposure Draft, if finalized as proposed, would require changes to the U.S. GAAP Financial Reporting Taxonomy (Taxonomy). We welcome comments on these proposed changes to the Taxonomy through ASU Taxonomy Changes provided at www.fasb.org. After the FASB has completed its deliberations and issued a final Accounting Standards Update, proposed amendments to the Taxonomy will be made available for public comment at www.fasb.org and finalized as part of the annual release process.





Proposed ASU—Income Taxes (Topic 740) - FASB Home ASU_mdash_Income... · Income Taxes (Topic 740)...

Documents

Transcript of Proposed ASU—Income Taxes (Topic 740) - FASB Home ASU_mdash_Income... · Income Taxes (Topic 740)...