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Wednesday, December 2, 2015

FASB Issues ASU Simplifying Balance Sheet Classifications for DTAs & DTLs

On November 20, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17 simplifying the balance sheet classification for deferred tax assets (DTAs) and deferred tax liabilities (DTLs). 

  • Public companies will be required to classify their DTAs and DTLs as noncurrent assets and liabilities for fiscal years and interim periods beginning after December 15, 2016 (for most public companies, Q1 of 2017). 
  • Private companies, however, will need to implement the all noncurrent classification standard for fiscal periods beginning after December 15, 2017 (for most companies the year ended 2018) and for interim periods beginning after December 15, 2018.

Early adoption is permitted even though the guidance will not be effective for several years. Both public and private companies can opt-in at the beginning of their respective interim or annual reporting periods. The guidance can either be applied prospectively or retrospectively.  However, if applied prospectively, entities are required to include quantitative information about the effects of the change on prior periods.

Currently, GAAP requires DTAs and DTLs to be classified as current or noncurrent based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. 

As part of its simplification initiative, FASB chose to implement this standard due to current complexities such as the valuation allowance allocation which is required on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets.  Another reason was to closer align GAAP with International Financial Reporting Standards (IFRS).

The new guidance will reduce the complexity (somewhat) in calculating income taxes but companies should be aware that the change to noncurrent classification may have significant effects on certain financial considerations (e.g., working capital requirements, the current ratio, debt covenants, etc.).


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