Document 1Contract
Acquisition agreement
Acquisition agreement. Sendrevia acquires 100% of the shares of Kelmora on 1 April 20X5 for 18,000,000 paid in cash. Income tax rates: Ostralia 20%, Norvania 25%, both enacted long ago and unchanged.
Cases
Practical case
Practical caseIAS 12L4 · Expert
Acquisition of a foreign subsidiary: deferred tax on the combination, goodwill, investment, share option plan and offsetting
8 documents13 tasks≈ 110 min
- Standards
- IAS 12 — Income Taxes
Assistance levelFree workspace · autonomous situation
- Method: withdrawn
- Checklist: withdrawn
- Hints: withdrawn
- Step-by-step work: withdrawn
Case brief
Situation
Sendrevia SA (a fictitious entity), a medical equipment group based in Norvania (a fictitious country, 25% tax), acquired on 1 April 20X5 the entire share capital of Kelmora SA, a manufacturer based in Ostralia (a fictitious country, 20% tax). You are preparing the consolidated IFRS financial statements for the year ended 31 December 20X5, authorised on 3 March 20X6. The consolidation team prepared a provisional purchase price allocation without any deferred tax; the chief financial officer wrote a memo of proposals. The tax rules of both countries are case data.
Your assignment
Determine the deferred tax arising from the combination and the goodwill, deal with Kelmora's tax losses recognised after the acquisition and with Sendrevia's own losses, analyse the investment in Kelmora and the planned distribution, calculate the deferred tax asset of the share option plan and its allocation, determine the offset presentation of deferred taxes, record the entries, measure their impact and answer the chief financial officer, including the disclosures required.
Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.
Autonomous professional situation
As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.
- Organise the work
- Document each point
- Argue the conclusion
Events
Chronology of the file
- January 1 20X5Grant date · Dated fact of the file
Document 6
- April 1 20X5Acquisition date · Dated fact of the file
Document 1
- September 15 20X5Date of the ruling · Dated fact of the file
Document 3
- December 10 20X5Date of the distribution decision · Dated fact of the file
Document 5
- December 31 20X5Reporting date · Dated fact of the file
Document 7
- March 31 20X6End of the measurement period · Dated fact of the file
Document 3
- December 31 20X7Vesting date · Dated fact of the file
Document 6
- December 31 20X8Expiry date of Sendrevia's losses · Dated fact of the file
Document 4
Documents
File documents
8 documents: open each one to read it.
Data
Key data from the documents
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Acquisition date | April 1 20X5 | |
| Consideration transferred | €18,000,000.00 | |
| Tax rate in Ostralia | 20% | |
| Tax rate in Norvania | 25% | |
| Kelmora's book net assets (equal to tax bases) | €11,000,000.00 | |
| Fair value adjustment to the land | €1,500,000.00 | |
| Fair value adjustment to the brand | €2,000,000.00 | |
| Identifiable net assets at fair value, before deferred tax | €14,500,000.00 | |
| Provisional goodwill without deferred tax | €3,500,000.00 | |
| Kelmora's tax losses carried forward | €1,000,000.00 | |
| Date of the ruling | September 15 20X5 | |
| End of the measurement period | March 31 20X6 | |
| Sendrevia's tax losses carried forward | €2,000,000.00 | |
| Annual royalties taxable in Norvania | €900,000.00 | |
| Expiry date of Sendrevia's losses | December 31 20X8 | |
| Consolidated carrying amount of the investment | €19,800,000.00 | |
| Tax base of the Kelmora shares | €18,000,000.00 | |
| Distribution decided for 20X6 | €1,000,000.00 | |
| Date of the distribution decision | December 10 20X5 | |
| Norvanian tax rate on dividends received | 5% | |
| Number of options granted | 300,000 units | |
| Grant date | January 1 20X5 | |
| Vesting date | December 31 20X7 | |
| Fair value per option at grant date | €4.00 | |
| Intrinsic value per option at the reporting date | €6.00 | |
| Cumulative expense of the plan at the reporting date | €400,000.00 | |
| Reporting date | December 31 20X5 | |
| Deferred tax liability proposed on goodwill | €840,000.00 | |
| Kelmora's market share | 14% | |
| Sendrevia's headcount | 1,250 units |
Sorting the information
Not every document matters: identify those that affect the accounting treatment.
Part 1 · Classification · Analysis
Sort each document: does it affect the accounting treatment?
Drag each item into its category, or tap the category under the item.
To sort8
Acquisition agreement
Provisional purchase price allocation
Ostralian tax ruling
Sendrevia tax memo
Minutes of Sendrevia's board meeting
Share option plan
Memo of proposals from the chief financial officer
Extract from the sales brochure
Relevant to the treatment0
No effect0
Workspace
Work programme
Organise your work freely: deal with each point, then argue your conclusion.
Task 1Analysis
Which temporary differences arise from the combination? Does goodwill give rise to deferred tax?
Task 2Calculation
Calculate the deferred tax on the fair value adjustments.
1 Part 1 · Calculation
Calculate the deferred tax on the fair value adjustments.
- €
- €
Checks
- 0 / 2 steps entered
- Amounts readable
Result: Deferred tax liability arising from the combination
Task 3Calculation
Calculate goodwill at the acquisition date, including deferred tax.
1 Part 1 · Calculation
Calculate goodwill at the acquisition date, including deferred tax.
- €
Checks
- 0 / 1 step entered
- Amounts readable
Task 4Professional judgement
How should Kelmora's losses recognised after the acquisition and Sendrevia's losses be treated?
1 Part 1 · Calculation
How should Kelmora's losses recognised after the acquisition and Sendrevia's losses be treated?
- €
Checks
- 0 / 1 step entered
- Amounts readable
Task 5Calculation
Calculate the goodwill adjustment for the acquired losses and the closing goodwill.
1 Part 1 · Calculation
Calculate the goodwill adjustment for the acquired losses and the closing goodwill.
- €
- €
- €
Checks
- 0 / 3 steps entered
- Amounts readable
Result: Goodwill at 31 December 20X5
Task 6Calculation
Calculate the difference relating to the investment in Kelmora and the part with no deferred tax.
1 Part 1 · Calculation
Calculate the difference relating to the investment in Kelmora and the part with no deferred tax.
- €
- €
Checks
- 0 / 2 steps entered
- Amounts readable
Result: Difference relating to the investment with no deferred tax liability
Task 7Calculation
Calculate the tax on the planned distribution.
1 Part 1 · Calculation
Calculate the tax on the planned distribution.
- €
Checks
- 0 / 1 step entered
- Amounts readable
Task 8Calculation
Calculate the estimated future deduction and the deferred tax asset of the share option plan.
1 Part 1 · Calculation
Calculate the estimated future deduction and the deferred tax asset of the share option plan.
- €
- €
Checks
- 0 / 2 steps entered
- Amounts readable
Result: Deferred tax asset of the share option plan
Task 9Calculation
Split this asset between profit or loss and equity.
1 Part 1 · Calculation
Split this asset between profit or loss and equity.
- €
- €
Checks
- 0 / 2 steps entered
- Amounts readable
Result: Part recognised in equity
Task 10Calculation
Determine the offset presentation of deferred taxes at 31 December 20X5.
1 Part 1 · Calculation
Determine the offset presentation of deferred taxes at 31 December 20X5.
- €
- €
- €
- €
Checks
- 0 / 4 steps entered
- Amounts readable
Result: Deferred tax liability presented
Task 11Journal entries
Record the entries for 20X5.
1 Part 1 · Journal entry · Journal entries
Entry 1 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCredit
TotalsDebit0Credit02 Part 2 · Journal entry · Journal entries
Entry 2 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCredit
TotalsDebit0Credit03 Part 3 · Journal entry · Journal entries
Entry 3 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCredit
TotalsDebit0Credit04 Part 4 · Journal entry · Journal entries
Entry 4 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCredit
TotalsDebit0Credit05 Part 5 · Journal entry · Journal entries
Entry 5 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCreditLine 3
DebitCredit
TotalsDebit0Credit06 Part 6 · Journal entry · Journal entries
Entry 6 of 6
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
AccountDescriptionDebitCreditLine 1
DebitCreditLine 2
DebitCreditLine 3
DebitCreditLine 4
DebitCredit
TotalsDebit0Credit0Task 12Effects on the financial statements
What is the impact of these entries on the consolidated financial statements?
1 Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
ItemIncreaseDecreaseNo effectFinancial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
2 Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
- €
- €
- €
Checks
- 0 / 3 steps entered
- Amounts readable
Result: Amount of the effect — Equity
Task 13Conclusion
Write the conclusion, including the disclosures required, and answer the chief financial officer.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Conclusion
Submission and solution
Complete every item of the file to submit it (0 / 21).
Document this file
These working papers use the data and results of this case.
Normative references
- IAS 12 §15
- IAS 12 §18
- IAS 12 §19
- IAS 12 §21
- IAS 12 §66
- IAS 12 §67
- IAS 12
- IAS 12 §58
- IAS 12 §38
- IAS 12 §39
- IAS 12 §40
- IAS 12 §81
- IAS 12
- IAS 12 §68A
- IAS 12 §68B
- IAS 12 §68C
- IAS 12 §71
- IAS 12 §74
- IAS 12 §75