Alert: FASB Accounting Standards Update – Income Taxes: Intra-entity Transfers of Assets Other Than Inventory

​​On October 24, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-16 Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory. The ASU seeks to reduce the complexity in accounting standards and diversity in practice related to income tax consequences of intra-entity transfers of intellectual property.

Currently, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an unrelated third party. This exception requires deferral of the income tax consequences of the transfer, resulting in a departure from the principle of comprehensive recognition of current and deferred income taxes under the United States’ Generally Accepted Accounting Principles (US GAAP).

The ASU eliminates the exception, thus, requiring an entity to recognize the income tax consequences of intra-entity transfers of a non-inventory asset (e.g. property, plant and equipment; intellectual property; etc.) when the transfer occurs. No changes were made to the accounting treatment for intra-entity transfers of inventory.This amendment aligns the recognition of income tax consequences for intra-entity transfers of non-inventory assets with the guidance in IAS 12 Income Taxes under International Financial Reporting Standards. No new disclosure requirements have been introduced in this amendment. However, existing disclosure requirements may now be applicable when accounting for the current and deferred income taxes related to the intra-entity transfer of a non-inventory asset.

The amendments are effective as follows:

• Public business entities – annual reporting periods beginning after December 15, 2017, including interim periods therein.
• All other entities – annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019.

Earlier adoption is allowed 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. The amendments should be applied on a modified retrospective basis through a direct cumulative-effect adjustment to retained earnings.

To access the full script of ASU No. 2016-16, click here.