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Journal entry — Income taxes — FASB discusses various simplification projects

Published on: Oct 24, 2014

At its meetings this month, the FASB discussed and made various tentative decisions related to its simplification initiative1 that could affect the accounting for income taxes.

Intra-Entity Asset Transfers and Balance Sheet Classification of Deferred Taxes

On October 22, 2014, the FASB voted to issue a proposed Accounting Standards Update (ASU) on the tax effects of intra-entity transfers of assets and the balance sheet classification of deferred taxes.

Tax Effects of Intra-Entity Transfer of Assets

The Board voted to remove the requirement under which the income tax consequences of intra-entity asset transfers are deferred until the assets are ultimately sold to an outside party. The tax consequences of such transfers would be recognized in tax expense when the transfers occur. This treatment is consistent with IAS 12.2 The Board acknowledged that the elimination of this exception in ASC 7403 might not reduce the cost entities incur by having to track book-tax differences. However, the Board believes that the change would better depict the economic effect (e.g., a cash tax payment) of those transfers and will lead to easier application of the general guidance in ASC 740.

The Board also tentatively decided to require a modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Since the period of adoption would not be comparable to the prior periods presented, entities would need to disclose the effects of the accounting change on the financial statements of the period of adoption.

Balance Sheet Classification of Deferred Taxes

The Board voted to classify all deferred taxes as noncurrent, with prospective application of this accounting change. Jurisdictional netting would still be required. In the proposed ASU, the Board will ask constituents for their views about the following two alternative approaches suggested by certain Board members: (1) present all deferred tax assets and deferred tax liabilities (DTAs/DTLs) in one place on the balance sheet without labeling them as either current or noncurrent despite the entity’s presentation of a “classified” balance sheet and (2) classify DTAs/DTLs as current or noncurrent in accordance with the estimated periods of reversal of the related temporary differences.

Effective Date

The proposed ASU would be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods for public business entities. Entities other than public business entities would have a one-year deferral, and early adoption would be permitted.

The FASB expects to issue the proposal early in 2015, with a 120-day comment period.

Employee Share-Based Payment Accounting

On October 8, 2014, the FASB added to its agenda a project to improve the accounting for employee share-based payments. The Board also began deliberating certain potential improvements and made the following tentative decisions related to accounting for and presenting taxes related to share-based payments:

  • Excess tax benefits/deficiencies upon vesting or settlement of awards — The Board decided to remove the requirement to defer recognition of an excess tax benefit until the benefit is realized. Further, entities would be required to recognize all excess tax benefits and tax deficiencies in income tax expense as opposed to recognizing some of those amounts in additional paid-in capital.
  • Statement of cash flows presentation of excess tax benefits — The Board decided to remove the requirement to present excess tax benefits in the cash flow statement as a cash inflow from financing activities and an offsetting cash outflow from operating activities.
  • Tax withholding requirements — The Board decided to revise the exception to the liability classification requirement for partial cash settlement of a share-based payment award for tax withholding purposes. Such a settlement provision alone would not lead to liability classification of the award when the withheld amount does not exceed the highest marginal tax rate in the relevant tax jurisdiction(s). Currently, the exception only applies when no more than the number of shares necessary for the minimum statutory withholding requirement to be met are repurchased or withheld.
  • Presentation of withholding taxes paid when shares are withheld — The Board also decided that cash payments associated with shares withheld to meet withholding tax requirements should be presented as a financing activity in the statement of cash flows. This decision is expected to eliminate diversity in practice.

The Board also tentatively decided to allow entities to elect as an accounting policy either to continue to estimate the total number of awards that will ultimately vest (i.e., account for estimated forfeitures in the periods compensation cost is recognized) or to account for forfeitures as they occur.


1 Launched in June 2014, the FASB’s simplification initiative is intended to reduce the cost and complexity of current U.S. GAAP while maintaining or enhancing the usefulness of the related financial statement information. The initiative focuses on narrow-scope projects that involve limited changes to guidance.

2 IAS 12, Income Taxes.

3 FASB Accounting Standards Codification Topic 740, Income Taxes.

Income taxes — FASB discusses various simplification projects Image

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