9.5 Hedge of a Net Investment in a Foreign Subsidiary
Entities sometimes enter into instruments (e.g., forward contracts) to
hedge their foreign currency exposure of a net investment in a foreign subsidiary. If an
instrument is designated as the hedging instrument in an eligible net investment hedge,
the gains and losses on it are initially recognized in the CTA line item of OCI 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.