FASB stipulations to this point have required that recognition of the income tax effects of intra-entity transfers be deferred until the asset is subsequently sold outside the affiliated group, a rule running counter to the general ASC 740 principle that current and deferred income taxes be recognized in the year that the event triggering them occurs.
Under the newly enacted ASU 2016-16, this deferral methodology goes away for all intercompany asset sales other than sales of inventory (which will remain under the previous FASB guidance). Companies will now be required to recognize the income tax effects (current and deferred) of intercompany non-inventory asset sales in the period in which they occur, despite the transaction being eliminated from consolidated pre-tax income. Thus, this new guidance both simplifies the accounting procedures for intra-entity transfers and adds transparency to their financial reporting, as the income statement tax effects recorded will typically coincide with any cash tax impact incurred in the same reporting period.
While FASB did not prescribe new financial statement disclosure requirements in this pronouncement, it has commented that existing disclosure requirements may apply to intra-entity transfers and their tax ramifications. For instance, companies may have to cite the tax effects of intra-entity transfers within their effective tax rate reconciliations or in disclosing the types of temporary differences giving rise to their deferred tax assets and liabilities.
ASU 2016-16 becomes effective for publicly traded companies in years beginning after December 15, 2017, including interim periods within those years (i.e., first quarter of 2018 for calendar-year companies). For non-public entities, they become effective for annual reporting periods beginning after December 15, 2018 and for interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted, but can only occur in the first quarter of a reporting year (e.g., first quarter 2017 for calendar year companies).
Questions? Contact us to discuss the new reporting requirements and what they might mean for your company.