The following table identifies the changes made to this Subtopic.
Topic
740 addresses the majority of differences between the financial reporting (or book) basis and tax basis of assets and liabilities (basis differences).
This Subtopic addresses the accounting for specific types of basis differences for entities operating in foreign countries. The accounting addressed in this Subtopic is limited to the deferred tax accounting for changes in tax or financial reporting bases due to their restatement under the requirements of tax laws or generally accepted accounting principles (GAAP) in the United States. These changes arise from tax or financial reporting basis changes caused by any of the following:
- a
- b
Price-level related changes
- c
This Subtopic addresses whether these changes, which can affect the amount of basis differences, result in recognition of changes to deferred tax assets or liabilities.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
830-10-15, with specific qualifications noted below.
The guidance in this Subtopic applies to all entities operating in foreign countries.
The guidance in this Subtopic applies to certain specified deferred tax accounting matters, specifically to the income
tax consequences of changes to tax or financial reporting bases from their restatements caused by:
- a
- b
Price-level related changes
- c
This Section addresses basis differences that result from remeasurement of assets and liabilities due to changes in
functional currency and price levels. These remeasurement changes will often affect the amount of temporary differences for which deferred taxes are recognized.
As a result of applying those requirements, the functional currency bases generally will exceed the local currency tax bases of nonmonetary items. The differences between the new functional currency bases and the tax bases represent temporary differences under Subtopic 740-10, for which deferred taxes shall be recognized. Paragraph
830-740-45-2 addresses the presentation of the effect of recognizing these deferred taxes.
Entities located in countries with highly inflationary economies may prepare financial statements restated for general price-level changes in accordance with generally accepted accounting principles (GAAP) in the United States. The tax bases of assets and liabilities of those entities are often restated for the effects of inflation.
When preparing financial statements restated for general price-level changes using end-of-current-year purchasing power units, temporary differences are determined based on the difference between the indexed tax basis amount of the asset or liability and the related price-level restated amount reported in the financial statements. Example 1 (see paragraph
830-740-55-1) illustrates the application of this guidance.
Temporary differences within an entity's foreign subsidiaries are referred to as inside basis differences. Differences between the tax basis and the financial reporting basis of an investment in a foreign subsidiary are referred to as outside basis differences.
Some remeasurement-caused changes in basis differences do not result in recognition of deferred taxes.
Paragraph
830-10-45-16 provides additional guidance on accounting for the eventual recognition of indexing related deferred tax benefits after an entity's functional currency changes from the
foreign currency to the reporting currency because the foreign economy becomes highly inflationary.
The remeasurement of deferred tax assets and liabilities at the end of the prior year is reported together with the remeasurement of all other assets and liabilities as a restatement of beginning equity.
Example 1 (see paragraph
830-740-55-1) illustrates the application of this guidance.
This Example illustrates the guidance in paragraphs
830-740-25-5 and
.
An entity has one asset, a nonmonetary asset that is not depreciated for financial reporting or tax purposes. The local currency is FC. Units of current purchasing power are referred to as CFC. The enacted tax rate is 40 percent. The asset had a price-level-adjusted financial reporting amount of CFC 350 and an indexed basis for tax purposes of CFC 100 at December 31, 19X2, both measured using CFC at December 31, 19X2. The entity has a taxable temporary difference of CFC 250 (CFC 350 - CFC 100) and a related deferred tax liability of CFC 100 (CFC 250 x 40 percent) using CFC at December 31, 19X2. General price levels increase by 50 percent in 19X3, and indexing allowed for 19X3 for tax purposes is 25 percent. At December 31, 19X3, the asset has a price-level-adjusted financial reporting amount of CFC 525 (CFC 350 x 150 percent) and an indexed basis for tax purposes of CFC 125 (CFC 100 x 125 percent), using CFC at December 31, 19X3. The entity has a taxable temporary difference of CFC 400 (CFC 525 - CFC 125) and a related deferred tax liability of CFC 160 (CFC 400 x 40 percent) at December 31, 19X3, using CFC at December 31, 19X3. The deferred tax liability at December 31, 19X2 is restated to units of current general purchasing power as of December 31, 19X3. The restated December 31, 19X2 deferred tax liability is CFC 150 (CFC 100 x 150 percent). For 19X3, the difference between CFC 160 and CFC 150 is reported as deferred tax expense in income from continuing operations. The difference between the deferred tax liability of CFC 100 at December 31, 19X2 and the restated December 31, 19X2 deferred tax liability of CFC 150 is reported in 19X3 as a restatement of beginning equity.
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\t19X2 19X3 Financial reporting basis CFC 350 ×\t1.5 CFC 525 Tax basis CFC 100 ×\t1.25 CFC 125 Temporary difference CFC 250 CFC 400 Tax rate\t× .40 ×.40 \"Deferred tax liability, end of year\" CFC 100 CFC 160 \"Deferred tax liability (restated), beginning of year\" CFC 100 ×\t1.5 CFC 150 Deferred tax expense CFC 10