Intra-Entity Transfers? Changes Coming!
If your company is involved in intra-entity sales and transfers of non-inventory assets, the recording of these transfers is about to change! Currently, a special exception allows entities to defer all gains and the related income tax expense of such sales and transfers until the assets leave the consolidated group. However, the guidance on the exception is limited, which led to diversity in practice.
The FASB is drafting an Accounting Standards Update (ASU) that will require immediate recognition of those items for all non-inventory, intra-entity asset sales and transfers. For example, if a company pays a dividend to its parent by transferring securities, the parent and the subsidiary will recognize any gains and related tax effects at the time of the transfer. The ASU will impact book reporting only at the individual company financial statement level.
The changes are expected to be implemented using a modified retrospective approach, with a cumulative-effect adjustment made directly to retained earnings as of the beginning of the period of adoption.
Aside from a note on the change in accounting principle, the FASB opted to forgo additional disclosure requirements. Entities must describe the reason for the change in accounting principle and certain quantitative information regarding the effects of the change.
The ASU is expected to be effective for public business entities (PBEs) for annual reporting periods beginning after December 15, 2017. PBEs will be prohibited from early adopting. The effective date for non-PBEs will be for annual reporting periods beginning after December 15, 2018. Non-PBEs will be allowed to early adopt as of the PBE effective date.
For more information on the forthcoming ASU, see the FASB’s project page.