FASB requires recognition of income tax consequences upon intra-entity transfers

The new standard is meant to simplify income tax reporting.

A new FASB accounting standard is designed to simplify the financial reporting for the income tax consequences of intra-entity transfers other than inventory.

Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, eliminates an exception to the principle of comprehensive recognition of current and deferred income taxes.

Under the new standard, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset when the transfer occurs. It applies to intra-entity transfers of assets such as intellectual property and property, plant, and equipment, but not inventory. Under current GAAP, entities are prohibited from recognizing current and deferred income taxes for an intra-entity transfer until the asset is sold to a third party.

Stakeholders had told FASB that the exception in GAAP resulted in an unfaithful representation of the economics of an intra-entity asset transfer because the exception requires deferral of the income tax consequences of the transfer, including income taxes payable or paid.

The board decided not to change GAAP for an intra-entity transfer of inventory because of concerns about benefits and costs. The new standard aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with IFRS.

For public business entities, the amendments take effect for annual reporting periods beginning after Dec. 15, 2017, including interim periods within those annual reporting periods. For all other entities, the standard takes effect for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual periods beginning after Dec. 15, 2019.

Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.

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