The Financial Accounting Standards Board has given companies an easier way to classify deferred taxes on balance sheets. The solution is simply to no longer classify them.
As part of its effort to simplify accounting standards, FASB heard from stakeholders who said the existing requirement to classify deferred income tax assets and liabilities into “current” and “noncurrent” amounts in the statement of financial position is pointless. As such, FASB proposed to revise accounting rules to say all deferred tax assets should be recognized as noncurrent. Hearing little objection, the board approved Accounting Standards Update No. 2015-17.
Deferred taxes appear in financial statements as a result of timing differences between tax reporting and financial reporting. Deferred tax assets represent taxes paid or carried forward but not yet recognized in the income statement. Deferred tax liabilities represent amounts that will be due to tax authorities in a future tax reporting period based on an event contained in the current financial statements.
FASB said it heard from stakeholders that the current classification requirement provides no important information because the classification is generally not aligned with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. The change to accounting rules now makes U.S. GAAP requirements more consistent with those in International Financial Reporting Standards as well.
FASB says the change in classification does not affect the current and continuing requirement that deferred tax assets and liabilities of a taxpaying component of an entity should be offset and presented as a single amount. The change to deferred tax classification takes effect for public companies beginning in 2017.
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