The FASB Simplifies the Balance Sheet Classification of Deferred Taxes

By Charles Webb, tax partner

On Nov. 20, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred taxes by requiring all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the balance sheet. This change is also intended to align U.S. GAAP with IFRS.

Overview and Impact

Currently, GAAP requires companies to present a net current and a net noncurrent deferred tax asset or liability for each jurisdiction on their balance sheet. This classification of current versus noncurrent is based on the underlying asset or liability to which it relates. Deferred tax assets and liabilities that do not relate to specific assets and liabilities recognized under GAAP on the balance sheet, such as net operating loss and tax credit carryforwards, are generally classified based on the expected reversal date of the temporary difference. Companies must then allocate valuation allowances among tax-paying jurisdictions as current and noncurrent on a pro-rata basis.

The FASB issued the ASU to reduce the complexity in financial reporting by eliminating the need to allocate valuation allowances on a pro-rata basis. The FASB agreed that the required disclosures under current U.S. GAAP provide little benefit to financial statement users, because the classification of deferred taxes as current versus noncurrent may not be consistent with the expected recovery or settlement time. The ASU does not change the existing requirement that only permits offsetting within a jurisdiction. However, each jurisdiction will only have one net noncurrent deferred tax asset or liability. Additionally, the ASU does not change the existing disclosure requirements for income taxes.

It is also important to note that total current assets and liabilities will likely be reduced. Companies that present significant current deferred tax assets and liabilities on their balance sheet today should evaluate how the change to noncurrent classification will impact financial ratios such as working capital and current ratios.

We believe this change is a welcomed benefit to companies applying U.S. GAAP. While the effective date for non-public entities is not mandatory until annual periods beginning after Dec. 15, 2017, we believe companies should seriously consider adopting the ASU as soon as possible.

Effective Dates

For public business entities, the ASU is effective for annual and interim periods beginning after Dec. 15, 2016. For other entities, the ASU is effective for annual periods in fiscal years beginning after Dec. 15, 2017, and interim periods in fiscal years beginning after Dec. 15, 2018. Early adoption at the beginning of an interim or annual period is allowed for all entities. The new standard may be applied either prospectively or retrospectively by reclassifying the comparative balance sheet.

For more information, contact Charles Webb at charles.webb@aprio.com or 404-898-8461.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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