Alert: FASB Accounting Standards Update No. 2016-16 - Income Taxes: Intra-entity Transfers of Assets Other Than Inventory

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-16 - 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.

This communication contains a general overview of the topic and is current as of December 30, 2016. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2016. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.