E.7 Recognizing Deferred Taxes on Foreign Nonmonetary Assets or Liabilities When the Functional Currency Is Not the Local Currency
Under U.S. GAAP, ASC 740 prohibits recognition of deferred tax
consequences for differences that arise from either (1) changes in exchange rates or
(2) indexing for tax purposes for foreign subsidiaries that are required to use
historical exchange rates to remeasure nonmonetary assets and liabilities from the
local currency into the functional currency. In other words, deferred taxes are not
recorded for basis differences related to nonmonetary assets and liabilities that
result from changes in exchange rates or indexing. Although these basis differences
technically meet the definition of a temporary difference under ASC 740, the FASB
has concluded that to account for them as a temporary difference is to effectively
recognize deferred taxes on exchange gains and losses that are not recognized in the
income statement under ASC 830. See Section
9.2.1 for additional guidance.
Under IFRS Accounting Standards, deferred taxes are recognized.
Paragraph 41 of IAS 12 states:
The non-monetary assets and
liabilities of an entity are measured in its functional currency (see IAS 21
The Effects of Changes in Foreign Exchange Rates). If the entity’s
taxable profit or tax loss (and, hence, the tax base of its non-monetary assets
and liabilities) is determined in a different currency, changes in the exchange
rate give rise to temporary differences that result in a recognised deferred tax
liability or (subject to paragraph 24) asset. The resulting deferred tax is
charged or credited to profit or loss (see paragraph 58).