APB 23: Exception to Recording Deferred Tax Liabilities

Posted on May 21, 2025 by Rachel Klein, CPA | Tags: APB 23, ASC 740, Deferred tax liabilities,

Generally, deferred taxes are recognized for all temporary differences between an entity’s book carrying amount and the tax basis of assets and liabilities that result in future tax consequences. However ASC 740, Income Taxes contains a few very narrow exceptions to the recognition of deferred taxes for temporary differences. Today’s post will focus on the exception found in ASC 740-30 commonly known as the “APB 23 exception”.

Entities pay taxes on foreign earnings, but they pay them when and where they are earned. However, if the entity meets the indefinite reversal criteria within ASC 740, they do not owe U.S. taxes on the foreign earnings until they are repatriated or the entity no longer meets the criteria.

What is the APB 23 exception?

According to ASC 740-30-25-3, it is presumed that all undistributed earnings of a subsidiary will be transferred to the parent entity. Therefore, unless the indefinite reversal criteria are met, entities would need to record a temporary difference on these undistributed earnings as follows:

Dr. Deferred tax expense XXX

Cr. Deferred tax liability XXX

However, according to ASC 740-30-25-17, the presumption that “all undistributed earnings will be transferred to the parent entity may be overcome, and no income taxes shall be accrued if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation.

A parent entity shall have evidence of specific plans for reinvestment of undistributed earnings of a subsidiary demonstrating that remittance of the earnings will be postponed indefinitely. These criteria required to overcome the presumption are sometimes referred to as the indefinite reversal criteria.”

Evidence of specific plans for reinvestment

It is important to note that the parent entity must have EVIDENCE of SPECIFIC PLANS for reinvesting the undistributed earnings of a subsidiary, which demonstrates that remittance of the earnings will be postponed indefinitely.

This means that being “undecided” is not good enough to use the APB 23 exception! Entities must have specific plans that are proven by evidence. Experience of the entities and definite future programs of operations and remittances are examples of the types of evidence required to substantiate the parent entity’s representation of indefinite postponement of remittances from a subsidiary.

What if circumstances change?

Nothing is forever and that applies to using the APB 23 exception too! ASC 740-30-25-15 explains that if circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future but income taxes have not been recognized by the parent entity, the entity must accrue these as an expense of the current period income taxes attributable to the remittance.

As economic conditions and global tax rules evolve, entities may reevaluate and revise their plans for repatriating or reinvesting undistributed foreign earnings. This reevaluation may or may not raise issues about the entity’s prior assertions regarding the indefinite reinvestment of earnings in foreign subsidiaries. Changes caused by unforeseen circumstances do not raise questions about the original application of the APB 23 exception. Considerations include:

Facts and circumstances that caused the change in condition
Likelihood of these facts and circumstances recurring
Entity’s expected actions if those facts and circumstances were to recur
Entity’s specific plans to continue reinvestment

The indefinite reversal criteria are a privilege, not a right. Entities need to substantiate their assertion regarding permanent reinvestment with evidence.

Frequency of use

The APB 23 exception used to be utilized significantly more prior to the U.S. tax reforms that occurred in 2017. We won’t dive deep into the details, but as part of the reforms there was an election that allowed certain U.S. foreign earnings previously accumulated to be deemed repatriated. Tax rules and regulations are constantly changing around the globe, with the tax rates in many “tax havens” becoming less lucrative. It’ll be interesting to see how the use of this exception evolves over time.

Final thoughts

Income taxes can be a very complex topic under both U.S. GAAP (ASC 740) and IFRS (IAS 12), but we’ve got resources to help:

As always, don’t hesitate to reach out to us with any questions you have!

About GAAP Dynamics
We’re a DIFFERENT type of accounting training firm. We view training as an opportunity to empower professionals to make informed decisions at the right time. Whether it’s U.S. GAAP, IFRS, or audit training, we’ve trained thousands of professionals since 2001, including at some of the world’s largest firms. Our promise: Accurate, relevant, engaging, and fun training. Want to know how GAAP Dynamics can help you? Let’s talk!

Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.