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As discussed in ASC 740-10-45-4, a reporting entity should present deferred tax assets and liabilities separate from income taxes payable or receivable on the balance sheet. Deferred tax assets and liabilities, along with any related valuation allowance, must be classified as noncurrent if a reporting entity presents a classified balance sheet.
As discussed in ASC 740-10-45-6, a reporting entity can only offset deferred tax assets and liabilities within a jurisdiction–that is, reporting entities are prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. An asset versus liability classification exercise must be completed for each applicable tax-paying entity in each tax jurisdiction. Accordingly, in a single balance sheet, deferred taxes may appear under two different classifications: noncurrent asset and noncurrent liability.
Question FSP 16-1 addresses the netting of deferred tax balances in a situation where a jurisdiction does not allow tax consolidation but does have an annual elective group relief provision.
Question FSP 16-1
A consolidated reporting entity operates in a jurisdiction that does not allow tax consolidation. However, the jurisdiction has annual elective group relief provisions for affiliated members, which allows a member with a loss for tax purposes to shift its loss to an affiliate that can use the loss to offset taxable income. For balance sheet presentation purposes, is netting the deferred tax balances permitted in the consolidated financial statements?
PwC response
A reporting entity must first determine whether the affiliated members are considered a single tax-paying component. We believe that the determining factors for this classification are (1) whether the taxing authorities can pursue one subsidiary for the other’s income tax liabilities, and (2) whether the election allows for offset in all cases (e.g., whether it allows carryback or carryforward of losses among affiliated members). If the taxing authority can pursue one subsidiary for the other’s income tax liabilities and if offset is unconditionally available, the affiliated members would be considered, in substance, a single tax-paying component and offsetting would be appropriate. However, if both of these conditions are not met, the affiliated members should be considered separate tax-paying components. As such, the deferred tax balances should not be offset, irrespective of whether the reporting entity plans to avail itself of the group relief provisions.
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