Got Intercompany Transactions? Prepare for Tax Changes!
By Jessica Lasher, CPA, Principal and Jillian Mulcahy, CPA, Senior Associate

 

If your organization has intercompany transactions, keep reading!  The FASB recently directed its staff to draft an Accounting Standards Update (ASU) that will result in the immediate recognition of gains from intercompany sales and transfers of non-inventory assets. For example, when Entity A transfers investments to Entity B, the difference in fair value and underlying cost will be recognized by each entity as of the date of transfer rather than when the assets are sold outside the consolidated group.

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Current income tax guidance contains an exception that allows the deferral of all gains and related income tax expense or benefit on intercompany sales and transfers until the asset leaves the consolidated group. The impact of the ASU will only be evident in an entity’s stand-alone financial statements, as the impact from asset sales or transfers is eliminated in consolidation.

For federal income tax reporting purposes, intercompany gains and losses continue to be deferred until assets leave the consolidated group. 

The ASU may override the conservatism principle when recording intercompany gains, but has no impact on losses, as they are already recognized immediately for book purposes and will continue to represent a deferred tax benefit due to their deferral under federal income tax laws.

The ASU will be effective for public business entities for periods beginning after December 15, 2017. For all other entities, it will be effective for periods beginning after December 15, 2018. Early adoption will be permitted and the ASU is to be applied retrospectively, with a cumulative catch-up adjustment to opening retained earnings in the period of adoption.  Please see the ASU for additional transition guidance.

The ASU is being drafted, but is expected to be released in the third quarter of this year.  For additional information visit the FASBs project page.

For more information, please contact:

Jessica Lasher, CPA, Principal: jlasher@johnsonlambert.com

Jillian Mulcahy, Senior Associate: jmulcahy@johnsonlambert.com