9.5 Hedge of a Net Investment in a Foreign Subsidiary
Entities sometimes enter into transactions to hedge their net investment
in a foreign subsidiary (e.g., through the use of a forward contract). Under the
derivatives and hedging guidance in ASC 815, such a transaction would be designated as a
hedge of the foreign currency exposure of a net investment in a foreign operation. Gains
and losses included in the assessment of hedge effectiveness are credited or charged
directly to OCI through the CTA in accordance with ASC 815-35-35-1.
If such a hedging transaction creates a temporary difference but the
parent does not provide for deferred taxes related to translation adjustments, the
deferred taxes should nonetheless be recognized for the temporary difference created by
the hedging transaction. The tax consequences of hedging gains or losses that are
attributable to assets and liabilities of a foreign subsidiary or foreign corporate
joint venture are not indefinitely postponed, as contemplated in ASC 740-10-25-3(a)(1),
because the tax consequences are generally recognized upon settlement (e.g., settlement
at the end of a contract period or repayment of a loan). Therefore, usually a DTL or DTA
will result from hedging gains and losses, irrespective of whether a parent entity’s
investment in a foreign subsidiary or foreign corporate joint venture is considered
indefinite. In accordance with the intraperiod allocation rules, specifically ASC
740-20-45-11(b), the tax consequences of establishing a DTA or DTL on an asset or
liability related to a hedging transaction is typically reported as a component of
CTA.