E.11 Deferred Taxes for Outside Basis Differences

In accordance with ASC 740-30-25-18(a), a DTL is generally not recognized for financial reporting basis in excess of tax basis in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration unless the difference is expected to reverse in the foreseeable future.

ASC 740-30-25-9 states that a DTA “shall be recognized for an excess of the tax basis over the amount for financial reporting of an investment in a subsidiary or corporate joint venture that is essentially permanent in duration [domestic or foreign] only if it is apparent that the temporary difference will reverse in the foreseeable future.” The need for a valuation allowance must also be assessed.

Note that in accordance with paragraph 64 of ASU 2015-10, the above exception to recognizing deferred taxes does not apply to partnerships (or other pass-through entities).

See Section 3.4 for detailed guidance on the accounting under ASC 740 for outside basis differences.

Under IFRS Accounting Standards, paragraph 39 of IAS 12 requires recognition of a DTL for all taxable temporary differences associated with any form of investee (domestic or foreign) unless (1) “the parent . . . is able to control the timing of the reversal of the temporary difference” and (2) “it is probable that the temporary difference will not reverse in the foreseeable future.”

In addition, paragraph 44 of IAS 12 states that a DTA is recognized for all deductible temporary differences associated with any form of investee (domestic or foreign) “to the extent that, and only to the extent that it is probable that . . . the temporary difference will reverse in the foreseeable future [and] taxable profit will be available against which the temporary difference can be [used].”

Similarly, an investor that holds a noncontrolling interest (in general, less than 50 percent ownership) in an investment that is not a corporate joint venture that is essentially permanent in duration (foreign or domestic) always recognizes a DTA for the excess tax basis of an equity investee over the amount for financial reporting purposes. As with all DTAs, in accordance with ASC 740-10-30-18, realization of the related DTA “depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback, carryforward period available under the tax law.” If all or a portion of the DTA is not more likely than not to be realized, a valuation allowance is necessary.

See Section 12.3.1 for additional guidance on deferred tax consequences of an investment in an equity method investment.

Under IFRS Accounting Standards, the guidance in paragraph 39 of IAS 12 on taxable temporary differences, and in paragraph 44 of IAS 12 on deductible temporary differences (see Section E.11.1), applies to the accounting for all outside basis differences associated with investments, regardless the form of the investee (i.e., subsidiary, branch, associate, or interests in joint arrangements).