Running head: CASE STUDY ACCOUNTING STANDARDS COMMITTEE 740

Case Study Accounting Standards Committee 740 And Accounting Principles Board 23
Johnathon Mackin
American Military University
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Abstract

This is a qualitative case study into Accounting Standards Committee 740 (ASC) and

Accounting Principles Board 23 (APB). Two examples will be utilized to provide a point of

reference for the application of ASC 740 and APB 23. The specific questions that are asked is if

overseas income if repatriated are taxable. I utilize a simple descriptive research design that is

qualitative and primary sourced. The significant finding is that repatriating income is taxable but if done

along certain routes can be non-taxable. The conclusion and recommendation are that the United

States tax code is complex and that just one aspect of the code may not apply. The application of the

tax code requires that people have a large knowledge base on the subject.

Keywords: taxes, income, repatriate, dividend ASC 740, APB 23, subsidiary, solely owned
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Case Study Accounting Standards Committee 740 and Accounting Principles Board 23

These case studies are an application of ASC 740 but also an application of all relevant

accounting standards. Accounting standards are not taken in parts but as a whole and applied as a

whole. Accounting Standard 740 details how tax positions must be shown as taken or not taken in

tabular form. These positions are deferred positions of losses, credits or unpaid taxes. ASC 740 is a guide

to maintain consistency of accounting and to document material changes. (Financial Accounting

Standards Board, 2009) APB 23 is the same document but not as far reaching. With that said the tax act

of 2004 allows subsidiary foreign companies that are qualified to remit dividends to parent companies

with no tax.

Statement of the Problem

The questions are: Do you agree with HSI’s conclusion that the indefinite investment exception

under ASC 740 should continue to be applied? After considering the Additional Facts, do you agree with

HSI’s conclusion that the indefinite investment exception under ASC 740 should continue to be applied

to historical undistributed earnings at the end of 20X3? The area to look at is: $100 million of available

cash in the United States. $400 million of cash obtained through a private placement offer of debt issued

by HSI. A distribution of $140 million from the European subsidiaries to the U.S. parent. How are they

to be treated?

Purpose

The purpose of these case studies is to relate the purpose of Accounting Standard Committee

740 and Accounting Principle Board 23 with an emphasis on the interpretation of these standards.

Significance. The benefit of these case studies is to impart a greater understanding of ASC 740

APB 23 through their application.

Theory. The theory behind ASC 740 and APB 23 is one at the basic level that foreign investment

is an operational activity and is treated as such. (Financial Accounting Standards Board, 2009)When that
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activity recaptures those operational investments and moves towards the primary goal of business, to

make money and distributes that money, then that revenue is taxed for the most part. There are small

areas of what I would term carve-out. Such as the cases that we have wherein a parent organization can

repatriate dividends from a subsidiary or liquidate that subsidiary with zero taxation.

Case One. 20X2 Event In the fourth quarter of fiscal year 20X2, a cash

distribution was made from the European subsidiaries to HSI, the U.S. parent entity. The

decision to make this distribution was in anticipation of a proposed change in U.S. tax

law expected to be enacted later in the 20X2 calendar year that would limit certain FTCs

that were available in the event of a distribution from its foreign subsidiaries; if passed,

the new law would negatively affect HSI’s ability to utilize these FTCs. The proposed

change in U.S. tax law was enacted shortly after HSI’s fiscal 20X2 year end. After the

20X2 cash distribution, management reevaluated its assertion about whether all

undistributed earnings of the European subsidiaries were indefinitely reinvested.

Management concluded that all historical undistributed earnings of the European

subsidiaries will be indefinitely reinvested, in part because the change in U.S. tax laws

resulted in a lower FTC benefit than was available under the prior law. In addition,

management provided evidence through a specific documented plan for reinvestment

of all historical undistributed earnings (i.e., those earnings that remained undistributed

at the end of 20X2) of these European subsidiaries. Historically, management has

complied with its specific documented plan for reinvestment of undistributed foreign

earnings, investing the earnings to both expand its European operations and to acquire

European based entities operating in similar lines of business. In the last 10 years, no

other distributions of foreign earnings from the European subsidiaries have taken place.

Therefore, HSI did not recognize deferred tax liabilities for the excess of the amounts for
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financial reporting over the tax bases in its investments in the European subsidiaries.

(Deloitte Development LLC., 2014)

Case Two. The distribution from the European subsidiaries occurred before the

private placement debt was issued. The debt issuance was originally planned for $400

million as documented in the financing proposal presented and approved by the board

of directors, which included an outside investment banker’s analysis of expected

demand for the proposed private placement. Because of the unexpectedly strong

investor interest in the private placement, HSI subsequently increased the amount of

the debt offering to $550 million and received approval from the board of directors for

the $150 million increase. Management stated that if the positive response to the debt

offering was known before the distribution was made from the European subsidiaries,

management would not have directed the subsidiaries to make the distribution. After

the 20X3 distribution, management reevaluated its assertion about whether all

undistributed earnings of the European subsidiaries were indefinitely reinvested. Before

the acquisition in 20X3, HSI had acquired five companies. All but one of these

acquisitions was outside the United States. HSI currently has no plans to acquire

additional U.S. entities and has no expectation that a further distribution of foreign

earnings to fund acquisitions will be required. Further, management assessed its

ongoing domestic cash flow needs. This cash flow analysis incorporated existing term

loans that are set to mature in May 20X4 and the private placement debt issued in 20X3

that will mature in 20X8. Management provided for two scenarios: the refinancing of

the term loans and the repayment of the term loans in 20X4. Based on the cash flow

analysis performed, management noted that future domestic cash needs, including
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covering debt maturities as they become due, would be satisfied from operating cash

flows in the U.S. (Deloitte Development LLC., 2014)

Summary

In my opinion none of the background really matters from the cases. The only thing needed was

the questions. ASC 740 is applicable to $100 million of available cash in the United States that cannot be

disputed the deductions and credits may be applied accordingly. The $400 million of cash obtained by a

private placement offer is again taxable. The $140 million distribution from European subsidiaries may

not be taxable. If these subsidiaries are qualified, then as long as the rules were followed with respect

to documentation of reinvestment in overseas subsidiaries and the subsidiaries are qualified then a

distribution in that manner is not taxable.

One aspect of these standards is that while the Financial Accounting Standards Board creates

these. The interpretation of them is very much more up to the accounting profession but in large order

the big four accounting firms are the ones that add the detail in their application. The Internal Revenue

Service also has a large hand in how these standards are put into practice by being able to modify these

standards through taxation.

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Reference

Deloitte Development LLC. (2014). Show Me the Money. Retrieved November 19, 2020, from

https://myclassroom.apus.edu/d2l/le/dropbox/22134/43798/DownloadAttachment?fid=288716

Financial Accounting Standards Board. (2009) Financial Accounting Series: Accounting Standards Update-

Income Taxes (Topic 740). https://asc.fasb.org/imageRoot/50/6844350.pdf

Walworth, M. (2016, September 16). Ready To Make a Change? Retrieved November 19, 2020, from

https://www.gaapdynamics.com/insights/blog/2016/09/27/indefinite-reversal-criteria-of-asc-

740-(apb-23)-a-worked-example/