Statutory Accounting Principles Working Group s8

Attachment H

Ref #2016-45

Statutory Accounting Principles (E) Working Group

Maintenance Agenda Submission Form

Form A

Issue: ASU 2016-16 – Intra-Entity Transfers of Assets Other than Inventory

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Interpretation

Description of Issue:

During October 2016, the FASB issued ASU 2016 - Intra-Entity Transfers of Assets Other than Inventory to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. As detailed in the ASU, Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in U.S. GAAP. Through discussions with stakeholders it was identified that the limited amount of authoritative guidance about this exception has led to diversity in practice and is a source of complexity in financial reporting, particularly for an intra-entity transfer of intellectual property. Stakeholders also expressed that this exception results in an unfaithful representation of the economics of an intra-entity asset transfer because the exception requires deferral of the income tax consequences of the transfer, including income taxes payable or paid. After consideration, FASB has determined that an entity should recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Therefore, this ASU eliminates the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this ASU are intellectual property and property, plant, and equipment. On the basis of stakeholders’ feedback, this ASU does not change U.S. GAAP for an intra-entity transfer of inventory. This ASU does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory.

Existing Authoritative Literature: SSAP No. 101—Income Taxes

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): None

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None

Convergence with International Financial Reporting Standards (IFRS): The amendments in this ASU align the recognition of income tax consequences for intra-entity transfers of assets, other than inventory, with International Financial Reporting Standards (IFRS). Specifically, IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs.

Staff Recommendation:

Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP No. 101 to adopt with modification, ASU 2016-16, as detailed below.

Proposed revisions to SSAP No. 101

Intercompany Income Tax Transactions

16. In the case of a reporting entity that files a consolidated income tax return with one or more affiliates, income tax transactions (including payment of tax contingencies to its parent) between the affiliated parties shall be recognized if:

a. Such transactions are economic transactions as defined in SSAP No. 25—Affiliates and Other Related Parties (SSAP No. 25);

b. Are pursuant to a written income tax allocation agreement; and

c. Income taxes incurred are accounted for in a manner consistent with the principles of FAS 109, as modified in paragraph 31.

17. A reporting entity shall recognize the income tax consequences of an economic intra-entity transfer of an asset, other than inventory, at the time of the transfer. Guidance in SSAP No. 25 shall be followed in determining whether any gains or increases in surplus from related party transactions shall be deferred.

3031. This statement adopts the provisions of FAS 109 except as modified in paragraph 2 of this statement which results in paragraphs 29-30, 36-37, 39, 41-42, 46, and 49-59 of FAS 109 being rejected, inasmuch as they are not applicable to reporting entities subject to this statement or are inconsistent with other statutory accounting principles. Paragraph 47 of FAS 109 is adopted with modification to provide for the disclosures required for non public reporting entities. This statement adopts ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory, as modified by paragraph 17 of this statement.

Staff Review Completed by:

Josh Arpin, NAIC Staff

October 2016

Status:

On December 10, 2016, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 101—Income Taxes to adopt with modification ASU 2016-16 – Intra-Entity Transfers of Assets Other than Inventory. This ASU requires reporting entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The proposed modifications from U.S. GAAP indicate that reporting entities shall apply the guidance in SSAP No. 25 in determining whether gains or increases in surplus shall be deferred.

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