FASB Simplifies Balance Sheet Classification of Deferred Taxes; Debt Covenants May Be Affected

December 1, 2015

The FASB has issued a rather significant update to improve upon the balance sheet presentation of deferred taxes. Upon adoption, deferred tax assets or liabilities will be presented on one line item as non-current assets or liabilities.

Current U.S. generally accepted accounting principles (U.S. GAAP) require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Accounting Standards Update (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes” was issued to simplify the presentation of deferred tax liabilities and assets.

If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change, the nature of and reason for, the change in accounting principle and quantitative information about the effects of the accounting change on prior periods to adjustments to provisional amounts that occur after the effective date.

For public companies, the ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Private companies won’t be required to adopt this ASU until years beginning after December 15, 2017, but early application is permitted for financial statements that have not yet been made available for issuance as of the beginning of an interim or annual reporting period.

More information can be found on the FASB website.

If you would like to discuss whether early adoption would be an option for your organization or how this will impact your current ratio and debt covenants, contact us.