In a sale transaction, it is common for one party to indemnify the other for a particular contingency. If the acquiree previously filed a separate tax return from the parent (i.e., seller), the indemnification agreement between the buyer and seller might be related to income tax positions taken by the acquiree before the transaction. In these situations, we believe that the seller’s indemnification obligation is not within the scope of ASC 740 (i.e., because the seller is not jointly and severally liable for the income tax obligations of the acquiree when the acquiree filed a separate return). Rather, the seller should account for the indemnification obligation in accordance with other applicable U.S. GAAP.
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