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There are several issues that should be considered when identifying temporary differences. First, ASC 740-10-25-3 lists exceptions to the use of the comprehensive model for recognizing deferred taxes. Refer to TX 2 for further discussion.
Additionally, under ASC 740-30-25-9, an outside tax-over-book basis difference in an investment in a subsidiary, or corporate joint venture that is essentially permanent in duration, will result in the recognition of a DTA only when it becomes apparent that the reversal of the temporary difference will occur in the foreseeable future. This is discussed in further detail in TX 11.5.

3.5.1 Taxable temporary differences–indefinite reversal patterns

The ASC 740 model generally does not take into account the timing of reversal of a taxable temporary difference. Although a reporting entity might be able to delay a tax effect indefinitely, the ability to do so is not a factor in determining whether a taxable temporary difference exists. ASC 740-10-55-63 addressed this issue.

Excerpt from ASC 740-10-55-63

Under the requirements of this Topic, deferred tax liabilities may not be eliminated or reduced because an entity may be able to delay the settlement of those liabilities by delaying the events that would cause taxable temporary differences to reverse. Accordingly, the deferred tax liability is recognized. If the events that trigger the payment of the tax are not expected in the foreseeable future, the reversal pattern of the related temporary difference is indefinite.

Although not typically considered in evaluating whether a temporary difference exists, the timing of reversal can impact the realizability of DTAs. See TX 5 for additional discussion of the assessment of the need for a valuation allowance.

3.5.2 Temporary differences not tied to an asset or liability

Some temporary differences result from events that have been fully recognized in the financial statements (i.e., no remaining asset or liability exists), but based on provisions of the tax law, require a different pattern of recognition for tax purposes. Such temporary differences will be taxable or deductible in the future and therefore cannot be identified with a particular asset or liability for financial reporting purposes. This is discussed in ASC 740-10-25.

ASC 740-10-25-24

Some temporary differences are deferred taxable income or tax deductions and have balances only on the income tax balance sheet and therefore cannot be identified with a particular asset or liability for financial reporting.

ASC 740-10-25-25

That occurs, for example, when a long-term contract is accounted for by the percentage-of-completion method for financial reporting and by the completed-contract method for tax purposes. The temporary difference (income on the contract) is deferred income for tax purposes that becomes taxable when the contract is completed. Another example is organizational costs that are recognized as expenses when incurred for financial reporting and are deferred and deducted in a later year for tax purposes.

ASC 740-10-25-26

In both instances, there is no related, identifiable asset or liability for financial reporting, but there is a temporary difference that results from an event that has been recognized in the financial statements and, based on provisions in the tax law, the temporary difference will result in taxable or deductible amounts in future years.

3.5.3 State temporary differences for US federal tax purposes

As referenced in ASC 740-10-55-20, state temporary differences have an effect on the calculation of US federal taxes.

ASC 740-10-55-20

State income taxes are deductible for U.S. federal income tax purposes and therefore a deferred state income tax liability or asset gives rise to a temporary difference for purposes of determining a deferred U.S. federal income tax asset or liability, respectively. The pattern of deductible or taxable amounts in future years for temporary differences related to deferred state income tax liabilities or assets should be determined by estimates of the amount of those state income taxes that are expected to become payable or recoverable for particular future years and, therefore, deductible or taxable for U.S. federal tax purposes in those particular future years.


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