How to Simplify Income Tax Accounting

The Financial Accounting Standards Board has issued two proposed accounting standards updates meant to Income Tax Accounting.

One would simplify income tax accounting for the tax effects of intra-entity asset transfers, while the other focuses on the classification of deferred tax assets and liabilities that are carried on the balance sheet. With respect to intra-entity asset transfers, FASB proposes to eliminate the exception in GAAP that prohibits a company from recognizing current and deferred income tax consequences of an intra-entity asset transfer until the asset is sold to an outside party.

FASB says the exception it proposes to eliminate represents a departure from GAAP for the recognition of current and deferred income taxes in GAAP. Stakeholders with an interest in the accounting have reported to FASB that the exception is not accompanied by heavy authoritative guidance, which has led to different practices among preparers, even though they find little use for the information the rule creates. FASB proposes to eliminate the exception, but the board acknowledges that would logically lead to process and intern controls changes, not to mention the potential for greater volatility in earnings. So FASB is looking for views on whether investors and preparers would swallow process change and the potential for earnings bumps in exchange for simpler accounting.

With respect to balance sheet classification, FASB proposes to require that all deferred tax assets and liabilities would be classified as noncurrent on corporate balance sheets. Current GAAP requires companies to separate deferred income tax liabilities and assets into current and noncurrent amounts when they produce a classified statement of financial position. FASB says the board hears for constituents that the classifications are costly for an entity to track and maintain, but provide little or no benefit to users of financial statements.

In both cases, FASB says its proposals are focused on trying to make accounting rules easier to follow without making financial statements any less useful to investors and other who rely on them. FASB says both changes also would align U.S. GAAP with International Financial Reporting Standards. Both proposals are open for comment through May 29.