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FASB's simplification of tax accounting for intra-entity asset transfers
The Financial Accounting Standards Board (FASB) has embarked on a simplification initiative to identify, evaluate and improve areas of GAAP for which the cost and complexity can be reduced while maintaining or improving the usefulness of financial information reported by an entity for its users. Taxand USA takes a look at the new initiative.
The proposed accounting standard would require an entity to recognise the current and deferred income tax consequences of intra-entity transfers of assets such as inventory, fixed assets and intangible assets at the time of the transfer. The seller in an intra-entity transfer would recognise tax expense immediately related to the taxable gain in the seller’s tax jurisdiction, while the buyer would recognise a deferred tax asset for the difference between the tax basis of the asset in the buyer’s tax jurisdiction and the cost of the asset reported in the consolidated group’s financial statements, not the buyer’s stand-alone book basis.
Along with the recognition of a deferred tax asset, the company would also be required to remeasure the asset with any changes in the buyer’s tax rate and evaluate the realisability of the asset in assessing its need for a valuation allowance.
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The proposed update would affect companies in a wide range of industries, with potential impact on their tax tracking, accounting procedures, internal controls and information systems. If the standard is adopted as drafted, the proposed change would take effect for calendar year-end public entities in 2017. Therefore, companies should be aware of how these changes could affect their specific organisation and assess the potential changes to current processes, systems and controls.