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Chapter 14 - Separate Financial Statements of A Subsidiary
Chapter 14 - Separate Financial Statements of A Subsidiary
a Subsidiary
Intercorporate
or intra-entity tax allocation (i.e., allocating
income taxes to entities within a consolidated
tax group) involves related parties and
typically results from an expressed or implied
agreement among the parties concerning the
allocation of taxes currently payable.
Intercorporate
It is not uncommon for intercorporate taxallocation agreements to be inconsistent with
arrangements that might have been derived on
an arms-length basis.
Intercorporate
ASC 850, Related Party Disclosures, and SAS
45/AU 334 recognize that a subsidiary does
not independently control its own actions and
that most related party transactions
including intercorporate tax allocations, might
have been structured differently if the
subsidiary had not been a controlled entity.
ASC 740-10-30-27
The consolidated amount of current and
deferred tax expense for a group that files a
consolidated tax return shall be allocated
among the members of the group when those
members issue separate financial statements
This Subtopic does not require a single
allocation method
ASC 740-10-30-27
The method adopted, however, shall be
systematic, rational, and consistent with the
broad principles established by this Subtopic
A method that allocates current and deferred
taxes to members of the group by applying this
Topic to each member as if it were a separate
taxpayer meets those criteria
ASC 740-10-30-27
In that situation, the sum of the amounts
allocated to individual members of the group
may not equal the consolidated amount. That
may also be the result when there are intraentity transactions between members of the
group
ASC 740-10-30-27
The criteria are satisfied, nevertheless, after
giving effect to the type of adjustments
(including eliminations) normally present in
preparing consolidated financial statements.
ASC 740-10-30-28
Examples of methods that are not consistent with
the broad principles established by this Subtopic
include the following :
A method that allocates only current taxes
payable to a member of the group that has
taxable temporary differences
ASC 740-10-30-28
A method that allocates deferred taxes to a member of
the group using a method fundamentally different
from the asset and liability method described in this
Subtopic (for example, the deferred method that was
used before 1989)
ASC 740-10-30-28
A method that allocates no current or deferred
tax expense to a member of the group that has
taxable income because the consolidated group
has no current or deferred tax expense.
ASC 740-10-50-17
An entity that is a member of a group that files a
consolidated tax return shall disclose in its separately
issued financial statements:
The aggregate amount of current and deferred tax
ASC 740-10-50-17
The principal provisions of the method by which
the consolidated amount of current and deferred
tax expense is allocated to members of the group
and the nature and effect of any changes in that
method (and in determining related balances to
or from affiliates) during the years for which the
above disclosures are presented.
Acceptable methods
ASC 740-10-30-27 through 30-28 require that
the consolidated amount of current and
deferred tax expense for a group that files a
consolidated tax return be allocated among the
group members when those members issue
separate financial statements
Acceptable methods
Further, the method adopted must be
systematic, rational, and consistent with the
broad principles of ASC 740. Typically, the
same method should be used to allocate tax
expense to each member of the consolidated
tax group
Acceptable methods
However, depending on the individual facts
and circumstances, it may be acceptable to use
more than one allocation method for different
subsidiaries in a consolidated group.
Acceptable methods
While ASC 740-10-30-27 through 30-28 does
not require the use of any single allocation
method, it does indicate that the following
methods are inconsistent with the broad
principles of ASC 740:
Acceptable methods
A method that allocates only current taxes
payable to a member of the group that has
taxable temporary differences
Acceptable methods
A method that allocates deferred taxes to a
member of the group using a method
fundamentally different from its asset and
liability method (the deferred method that was
used before 1989 is cited as an example)
Acceptable methods
A method that allocates no current or deferred
tax expense to a member of the group that has
taxable income because the consolidated group
has no current or deferred tax expense
Benefits-for-loss
Another type of tax allocation, known as
benefits-for-loss, may be considered to comply
with the criteria of ASC 740-10-30-27 through
30-28.
Benefits-for-loss
This approach modifies the separate return method
Benefits-for-loss
Thus, when the benefit of the net operating
loss (or other tax attribute) is recognized in the
consolidated financial statements, the
subsidiary would generally reflect a benefit in
its financial statements.
Benefits-for-loss
However, application of this policy may be
complicated when the consolidated group is in
an AMT position or requires a valuation
allowance on its deferred tax assets.
Benefits-for-loss
To comply with the criteria in ASC 740, the
policy should not be applied in a manner that
results in either current or deferred tax benefits
being reported in the separate subsidiary
financial statements that would not be considered
realizable on a consolidated basis unless such
benefits are realizable on a stand-alone basis.
Benefits-for-loss
While not a pre-requisite, oftentimes the
benefits-for-loss policy mirrors the taxsharing
agreement between the parent and the
subsidiary
Benefits-for-loss
To the extent that the consolidated return
group settles cash differently than the amount
reported as realized under the benefits-for-loss
accounting policy, the difference should be
accounted for as either a capital contribution
or as a distribution (see TX 14.2 below).
Other methods
If another method or a modified method
(described above) is used, it must be
determined whether that method falls within
the parameters of ASC 740-10-30-27 through
30-28
Other methods
The tax allocation requirements of ASC 740
pertain to the allocation of expense; yet the
basic methodology of ASC 740 pertains to the
determination of deferred tax liabilities or
assets based on temporary differences.
Other methods
Although the allocation method must be
consistent with the broad principles of ASC
740, it is not clear whether any correlation is
intended between an individual members
temporary differences and the portion of the
consolidated deferred tax liabilities and assets
that are reflected in its separate statements.
Other methods
In most cases, the same allocation method
should be applied to all members of the group.
However, there may be facts and
circumstances that prompt the use of different
methods for certain members of a consolidated
group.
Change in method
A change in tax-allocation policy is considered
a change in accounting principle, as ASC 740
prescribes criteria that an intra-entity taxallocation policy must meet to be considered
acceptable under U.S. GAAP.
Change in method
Therefore, the change in policy must be justified as
preferable given the circumstances, and an SEC
registrant must obtain a preferability letter from its
auditors. Companies need to follow the guidance in
ASC 250, Accounting Changes and Error
Corrections, which requires a retrospective
application.