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If a tax-sharing agreement differs from the method of allocation under ASC 740-10-30-27, the difference between the amount paid or received under the tax-sharing agreement and the expected settlement amount based on the method of allocation is treated as a dividend (i.e., when less cash was received or more cash was paid by the subsidiary than would have been expected under the method of tax allocation) or a capital contribution (i.e., when more cash was received or less cash was paid by the subsidiary than would have been expected under the method of tax allocation). For example, a single-member limited liability company (LLC) that presents a tax provision on the separate return basis, but is not required to remit cash to the parent for any amounts payable, should characterize the amounts payable as a capital contribution (because less cash was paid than would have been expected under the allocation method). A single-member LLC should also characterize the amounts payable or receivable as a capital contribution or dividend if the parent decides not to collect tax from or reimburse a subsidiary under a tax-sharing arrangement that would otherwise require settlement. Example TX 14-2 illustrates the accounting for differences between the tax-allocation method and tax-sharing arrangement.
Differences between amounts expected under a tax-allocation method and amounts settled under the tax-sharing arrangement
A subsidiary that prepares separate company financial statements is included in the consolidated tax return of the parent. The subsidiary uses the separate return method to determine income taxes in its stand-alone financial statements. Under the tax-sharing arrangement, the subsidiary pays taxes to or receives tax refunds from the parent based on the separate return method. When the subsidiary generates operating losses that are carried back to offset tax liabilities on the consolidated tax return, the parent establishes an intercompany account to the subsidiary in lieu of remitting cash.
In 20X1, the subsidiary generated operating losses that resulted in a $100 million receivable from the parent because the subsidiary reported that, under the separate return method, the operating losses were being carried back to taxable income from prior years. The parent decided that it will not cash-settle the intercompany account with the subsidiary.
How should this decision be recorded in the subsidiary’s separate company financial statements?
The decision by the parent not to cash-settle the subsidiary’s intercompany receivable should be recorded as a dividend in the separate financial statements of the subsidiary. In essence, the parent has amended the tax-sharing arrangement with the subsidiary. The excess of the expected settlement amount based on the method of allocation ($100 million) over the actual settlement amount under the amended tax-sharing arrangement ($0) should be recorded in equity.

14.3.1 Tax sharing agreement—settlement of temporary differences

A tax-sharing agreement may call for settlement of a separate reporting entity’s deferred tax assets and liabilities. This type of agreement may lead to a question about whether it is appropriate for the separate reporting entity to derecognize the deferred tax assets and liabilities that are settled under the tax-sharing agreement.
Derecognition of deferred tax assets and liabilities related to temporary differences is inconsistent with the broad principles of ASC 740. This is because a basis difference continues to exist at the separate reporting entity even after the separate reporting entity is paid by, or makes a payment to, its parent to settle the deferred tax assets and liabilities. However, if the tax-sharing agreement requires the parent to pay the separate reporting entity for the tax benefits of net operating losses or other tax attributes unrelated to temporary differences of the separate reporting entity’s assets and liabilities, we believe it is acceptable for the separate reporting entity to derecognize those settled attributes in its separate financial statements.

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