How ASU 2015-17 Changes Deferred Tax Classification

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to make changes to U.S. Generally Accepted Accounting Principles (GAAP). In November 2015, the FASB issued ASU 2015-17, a targeted update that altered how companies must present deferred income taxes on their balance sheets. This guidance was part of a broader initiative to reduce complexity in financial reporting.

Simplifying Deferred Tax Classification

Historically, accounting rules required a complex presentation of deferred taxes on the balance sheet. Companies had to separate their deferred tax assets and liabilities into current and noncurrent portions based on the classification of the underlying asset or liability. This process was often costly, requiring companies to schedule when temporary differences were expected to reverse.

ASU 2015-17 introduced a significant simplification to this practice. The update mandates that all deferred tax assets and liabilities, as well as any related valuation allowance, must be classified as noncurrent on the balance sheet. This change eliminates the need for the burdensome scheduling exercise. The primary driver was feedback from financial statement preparers and users who argued the old method provided little useful information.

To illustrate the change, a company’s balance sheet before the update might have shown separate current and noncurrent deferred tax assets and liabilities. After adopting ASU 2015-17, the balance sheet reports a single net noncurrent deferred tax asset or liability for each tax-paying jurisdiction. This approach aligns U.S. GAAP more closely with International Financial Reporting Standards (IFRS).

Implementation and Adoption Methods

For public business entities, the standard was effective for annual periods beginning after December 15, 2016. For all other entities, such as private companies, the amendments became effective for annual reporting periods beginning after December 15, 2017. The FASB permitted early adoption for all entities.

Companies were given a choice between two methods to transition to the new standard: prospective or retrospective application. Prospective application means the company applies the new rule only to the current and future periods, leaving prior financial statements as they were originally reported.

The alternative, retrospective application, involves revising prior-period financial statements to reflect the new standard. This approach enhances comparability between periods by presenting historical data on the same basis as the current data. For example, a company choosing this method would reclassify its 2015 deferred tax balances to be entirely noncurrent in its 2016 financial statements.

Required Financial Statement Disclosures

Upon adopting ASU 2015-17, companies were required to include specific disclosures in the footnotes to their financial statements about the change in accounting principle.

The specific disclosures depended on the transition method chosen. If a company elected to apply the changes retrospectively, it was required to disclose quantitative information about the effects of the change on the prior periods presented.

For entities that chose prospective application, companies were required to state in their footnotes that prior periods were not retrospectively adjusted. This disclosure ensures transparency about the lack of comparability in the classification of deferred taxes between the periods shown.