ASU 2015-17 Balance Sheet Classification of Deferred Taxes (ASU 2015-17) is meant to reduce complexity surrounding the presentation of deferred tax liabilities and assets. Specifically, upon adoption, all deferred tax liabilities and assets shall be classified as noncurrent in a classified statement of financial position. There is no impact on a non-classified balance sheet as a result of this ASU.
This ASU was effective for public business entities in fiscal years beginning after December 15, 2016 and interim periods within those annual periods. For all other entities, this ASU will be effective in fiscal years beginning after December 15, 2017 and in interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. This ASU gives entities the choice to apply either prospectively or retrospectively.
The most significant item of note is deferred tax liabilities and assets should be classified as noncurrent in a classified statement of financial position. Entities are still required to offset the deferred tax liabilities and assets, as well as all related valuation allowances, for all tax-paying components and present as a single noncurrent amount (same taxing authority). The concept of offsetting the deferred tax liability and deferred tax asset from jurisdiction against a deferred tax liability or deferred tax asset of another jurisdiction is still not allowed. For instance, if an entity has a taxing jurisdiction in New York that has a resulting deferred tax asset and a deferred tax liability in New Jersey, these would not be able to be netted and presented as one line item on the financial statements. There would be a separate deferred tax asset and deferred tax liability presented, both being noncurrent.
As part of the adoption of the ASU, you will need to consider the potential impact on working capital, as well as financial covenants. The adoption of this ASU may result in you needing to request modifications of your debt covenants to ensure continued compliance.
Aaron Kofira is a partner based out of our Rochester, NY office.