In its ongoing journey to simpler accounting, the Financial Accounting Standards Board has issued another simplification targeting accounting for income taxes. This one tells entities it’s OK to recognize the current and deferred income taxes associated with transfers of assets other than inventory within entities that are related to one another.
GAAP has long prohibited entities from recognizing the tax consequences associated with such asset transfers until the asset in question is ultimately transferred out of the entire organization. That led to some differences in how companies shuffled about those deferred tax consequences as assets moved around, especially when the asset in transfer is an intangible asset, like intellectual property.
FASB said it heard from stakeholders that the long-standing rules produced less-than-faithful representation of the economics of non-inventory asset transfers because it required entities to defer the income tax consequences, even income taxes that were due or had been paid.
“The board 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,” FASB says in its summary of the new update to accounting standards. The standard will apply to intellectual property and any physical assets like plant, property, or equipment, but it will not apply to inventory.
With respect to inventory, FASB says the accounting and consequences are different, and the costs and benefits associated with changing the standards did not merit simplifying the rules. FASB says in addition to simplifying GAAP, the new rule also produces yet one more way that GAAP will now be more consistent with International Financial Reporting Standards.
The new standard would not require new disclosure, although FASB points out existing disclosure requirements may still apply. Separately, FASB is working on another project to change disclosure around income taxes that will shed some light on a company's domestic vs. foreign tax obligations.
The new accounting takes effect for public companies in 2018 with early adoption permitted.