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Accounting Standards Update – Simplification Initiative

As part of the Simplification Initiative, the FASB issued the Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740), in November 2015.  This ASU will affect the balance sheet without impacting the reporting of earnings.  The modification of this standard further aligns U.S. GAAP with international standards.

Under the current standards, deferred taxes are reported as either current or non-current based upon the underlying source of the deferral and whether the reversal was expected within the next 12 months.  Thus, timing differences between the financial and tax bases of current assets and liabilities resulted in the deferred taxes being reported as current assets or liabilities and non-current assets and liabilities lead to the deferred taxes reported as other assets or liabilities.  Deferred tax offsets were limited to current assets against current liabilities and non-current assets against non-current liabilities.

The problem was when the non-current components of deferred taxes started to reverse either in total or over a period of time.  For example, if a fixed asset is depreciated on a straight-line basis over 5 years for financial statements purposes and utilized Section 179 for tax purposes.  Though it will take another 4 years for the two methods to equalize, 20% will occur within the next 12 months, with the remaining amount being non-current.  When multiplied by variations between useful and statutory lives, various accelerated tax methods, and acquisitions over several years, the cost of managing the allocations between current and non-current outgrew the benefit.

Under this ASU, deferred taxes will be reported as either a non-current asset or liability and will become effective for public entities beginning after December 15, 2016 (December 15, 2017 for all other entities).  Early adoption is permitted and can be prospectively or retrospectively applied.

For companies with significant current deferred tax assets or liabilities, their current ratios will experience an unexpected benefit from moving a net liability or decline from a net asset.  For all other entities, the adoption of this ASU will result in minimal impact on their financial statements.

For more information about this initiative, please contact Mitchell Davis, CPA, CCIFP, Audit Manager, of Grassi & Co. at mdavis@grassicpas.com.