On November 20, 2015, as part of the Financial Accounting Standards Board’s (“FASB”) initiative to reduce complexity in accounting standards (the Simplification Initiative), FASB published Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). This update simplifies the presentation of deferred income taxes by requiring all entities that present a classified balance sheet to classify all deferred tax assets and liabilities as a noncurrent amount.
Under current GAAP, entities presenting a classified balance sheet are required to show both current and noncurrent amounts for deferred tax assets and liabilities based on the classification of the related asset or liability. Those deferred tax assets and liabilities which are not related to a specific asset or liability (i.e. NOL’s and tax credit carry forwards) are classified based on their expected reversal date. Valuation allowances, if required, are also allocated on a prorata basis between current and noncurrent deferred tax assets.
Many stakeholders noted that current GAAP requirements provide minimal benefit for financial statement users because the classification does not generally align with the time period the deferred tax assets and liabilities are expected to be recovered or settled. They felt the costs incurred to separate current and noncurrent deferred tax items far outweighs the benefits of the current GAAP presentation.
In response, FASB issued ASU 2015-17 acknowledging that current GAAP classification created unnecessary cost and complexity. While FASB acknowledged that the classification of all deferred tax assets and liabilities as noncurrent is not “conceptually pure”, due to its ongoing Simplification Initiative FASB felt this would reduce the cost and complexity of recording deferred taxes without decreasing the usefulness of information presented to financial statement users.
ASU 2015-17 does not change the offsetting requirements for deferred tax assets and liabilities which results in the presentation of one amount on the balance sheet, nor does it change the requirement that deferred tax assets and liabilities arising from different taxing jurisdictions cannot be offset against each other. For example, companies cannot offset a tax asset from one jurisdiction with a tax liability of another jurisdiction.
Furthermore, FASB opted not to change existing disclosure requirements for income taxes since they believe that current GAAP already provides users with information regarding deferred tax assets and liabilities. FASB will be evaluating income tax disclosures as part of its disclosure framework project.
The new guidance will be effective for public entities in fiscal years beginning after December 15, 2016, including interim periods within those years (i.e. in the first quarter of 2017 for calendar year end entities). For all other entities, the amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. FASB permits early adoption by all entities as of the beginning of any interim or annual reporting period.
The guidance may be applied either on a prospective or retrospective basis. With prospective adoption, the business presents the new information on a go-forward basis and is required to disclose a statement indicating the deferred tax assets and liabilities from prior periods were not retrospectively adjusted. Under retrospective adoption, the entity must present past financial information using the new accounting guidance and disclose the quantitative effects that the change had on deferred tax liabilities and assets on prior periods.
The new guidance should simplify financial reporting for many entities. If you have any questions, concerns, or would like additional information, please contact your HW&Co. Executive or Cheryl Lanese, CPA, CGMA at 877-FOR-HWCO.