Deferred tax in business combinations

Learning objectives

• Calculate the deferred tax on the fair value adjustments in a business combination and its effect on goodwill.L3
• Distinguish the acquirer's own deferred tax asset (outside the business combination) from the acquired tax benefits (within the business combination).L3, L4
• Determine the treatment of acquired tax benefits recognised after the acquisition date (measurement period, goodwill, profit or loss).L4

Normative references

• IAS 12 §18Temporary differences also arise when: (a) the identifiable assets acquired and liabilities assumed in a business combination are recognised at fair value (IFRS 3) with no equivalent tax adjustment (para. 19); (b) assets are revalued with no equivalent tax adjustment (para. 20); (c) goodwill arises in a business combination (para. 21); (d) the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example for a non-taxable grant related to an asset (paras. 22 and 33); (e) the carrying amount of investments in subsidiaries, branches, associates or joint arrangements comes to differ from their tax base (paras. 38 to 45). Exchange differences on non-monetary items are dealt with in para. 41.
• IAS 12 §19In a business combination, the identifiable assets acquired and liabilities assumed are recognised at their fair values at the acquisition date, with no equivalent adjustment for tax purposes: temporary differences arise when their tax bases are not affected by the business combination or are affected differently.
• IAS 12 §32AIf the carrying amount of goodwill arising in a business combination is less than its tax base, the difference gives rise to a deferred tax asset, recognised as part of the accounting for the business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised.
• IAS 12 §58Current and deferred tax are recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from a transaction or event that is recognised outside profit or loss (in other comprehensive income or directly in equity) or from a business combination.
• IAS 12 §66Temporary differences may arise in a business combination; recognising the related deferred tax assets and liabilities affects the amount of goodwill or of the bargain purchase gain.
• IAS 12 §67A business combination may change the probability of realising a pre-acquisition deferred tax asset of the acquirer (for example, by using its unused tax losses against the future taxable profit of the acquiree); the acquirer recognises the change in its deferred tax asset in the period of the business combination, without including it in the accounting for the business combination.
• IAS 12Acquired deferred tax benefits not recognised at the acquisition date but recognised subsequently: if recognised within the measurement period and resulting from new information about facts and circumstances that existed at the acquisition date, they reduce the carrying amount of the related goodwill, any excess once goodwill has been reduced to zero being recognised in profit or loss; all others are recognised in profit or loss (or outside profit or loss when the standard so requires).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

25 questions

• On acquiring Ternelle, the Sauvigal group recognises a brand in its consolidated financial statements at fair value, 500,000. In Ternelle, taxed separately, the internally created brand has no tax base (case data). The finance director considers that no deferred tax should be recognised, since the transaction 'does not go through profit or loss'. Which analysis should be adopted?L3
• In a business combination, if the tax base of an acquired identifiable asset is not changed while the asset is recognised at its fair value at the acquisition date, a temporary difference arises.L3
• The deferred tax liability arising from the fair value adjustments of a business combination is recognised as deferred tax expense in consolidated profit or loss for the period of acquisition.L3
• When the acquisition of a profitable subsidiary makes the use of the acquirer's past tax losses probable, the deferred tax asset thus recognised by the acquirer reduces the goodwill on the acquisition.L3
• A deferred tax benefit acquired in a business combination, not recognised at the acquisition date, is recognised eighteen months later, after the measurement period has closed, following an increase in the subsidiary's profits: it is recognised in profit or loss and not as a reduction of goodwill.L4
• In the acquirer's consolidated financial statements, what is the effect of recognising the deferred tax liabilities arising from the fair value adjustments of a business combination?L3
• In a business combination, the goodwill recognised by the Ferondil group amounts to 1,000,000, whereas local tax law (case data) gives it an amortisable tax base of 1,300,000. What does IAS 12 provide for the difference of 300,000?L3
• The Halquentin group acquires Pruvenza. Which items are part of the accounting for the combination and therefore change goodwill at the acquisition date?L3
• A deferred tax benefit acquired in a business combination was not recognised at the acquisition date. Which statements about its subsequent recognition are correct?L4
• The Brezolan group acquires Quessaro. At the acquisition date, a warehouse is recognised at its fair value of {building_fair_value}, its tax base remaining {building_tax_base}; a customer list not recognised by Quessaro is recognised at {customer_list_fair_value}, with a nil tax base. The applicable tax rate is {tax_rate}%. Compute the deferred tax liability arising from these adjustments.L3
• On acquiring Morliandre, the Taldrix group recognises: inventories at their fair value of {inventory_fair_value} (tax base {inventory_tax_base}); patents at {patents_fair_value} (nil tax base); a litigation liability assumed of {litigation_liability}, tax deductible when paid (nil tax base). The group's future taxable profits allow the deductible difference to be used. Tax rate: {tax_rate}%. Compute the deferred tax liability and asset arising from the combination.L3
• The Vasquel group acquires 100% of Obrevain for consideration of {consideration}. The identifiable assets acquired and liabilities assumed, measured at fair value, represent net assets of {net_assets_before_tax} before deferred tax; the fair value adjustments create taxable temporary differences of {taxable_differences}, the tax bases being unchanged. Tax rate: {tax_rate}%. Teaching assumption: goodwill = consideration − identifiable net assets (no non-controlling interests). Compute goodwill.L3
• Jaskova is 100% acquired by the Pellorix group for {consideration}. Before deferred tax, identifiable net assets at fair value are {net_assets_before_tax}. The combination gives rise to taxable differences of {taxable_differences} and deductible differences of {deductible_differences}, whose use is judged probable. Tax rate: {tax_rate}%. Using the teaching assumption goodwill = consideration − identifiable net assets, compute goodwill.L3
• In the consolidated financial statements of the Drunelle group, the brand of the acquiree Nimbrage is recognised at its fair value of {brand_fair_value}; its tax base is nil. Tax rate: {tax_rate}%. Goodwill was provisionally computed without deferred tax. Record the additional entry at the acquisition date.L3
• Kervadin had tax losses carried forward of {acquirer_losses}, with no deferred tax asset for lack of probable profits. It acquires Lumbrac, which is highly profitable; tax law (case data) now allows it to set those losses against Lumbrac's profits, and their use becomes probable. Tax rate: {tax_rate}%. Record the entry for Kervadin's losses.L3
• The Orsavel group had not recognised a deferred tax asset on its warranty provisions of {warranty_provisions}, deductible when paid, for lack of probable taxable profit in its tax entity. The tax absorption of a profitable acquiree within the same taxable entity makes such profit probable at the acquisition date. Tax rate: {tax_rate}%. Record the entry at Orsavel.L4
• Seven months after acquiring Isparo, within the measurement period, the tax review carried out by the Arquevin group reveals tax losses carried forward of Isparo that existed at the acquisition date and were not identified then: the corresponding deferred tax benefit, judged recoverable, amounts to {acquired_benefit}. The goodwill related to Isparo has a carrying amount of {goodwill_carrying_amount}. Record the entry.L4
• The Belcastor group acquired Calvidra in March 20X5 (twelve-month measurement period, case data). Two acquired deferred tax benefits, not recognised at the acquisition, are recognised later: {benefit_in_period} in November 20X5, following new information about losses that existed at the acquisition date; {benefit_after_period} in June 20X6, following higher taxable profits than expected. The related goodwill amounts to {goodwill_carrying_amount}. Compute the total reduction in goodwill and the income recognised in profit or loss.L4
• For the acquisition of Dorvenne, the Estriva group's consolidation file shows: identifiable net assets at fair value 5,200,000; consideration 6,000,000; goodwill 800,000. A note states that the deferred tax liability of 240,000 on the remeasurement of Dorvenne's assets 'will be charged to profit or loss at year-end'. Where is the error?L3
• The Falquenne group acquires Gernasse, whose future profits at last make probable the use of Falquenne's own tax losses carried forward (potential asset 700,000). The financial controller recorded: debit deferred tax asset 700,000, credit Gernasse goodwill 700,000. Where is the error?L4
• The Hollivane group acquired Jorvella in January 20X4 (twelve-month measurement period, case data). In September 20X6, the recovery in Jorvella's profits makes recoverable acquired losses not recognised until then: benefit 320,000. Hollivane debited the deferred tax asset and credited Jorvella's goodwill by 320,000. Where is the error?L4
• The Mercadine group acquires Norvaline on 1 April 20X5; goodwill amounts to 4,000,000. In October 20X5, still within the measurement period, a review of Norvaline's past tax returns reveals tax losses carried forward that existed at the acquisition date; the corresponding deferred tax benefit, judged recoverable, is 600,000. Which treatment applies?L4
• The Quorvane group acquires Rastelle on 1 February 20X5; Rastelle's tax losses carried forward (potential benefit 250,000) are not recognised, for lack of probable profits. In August 20X5, within the measurement period, Quorvane awards Rastelle a subcontracting contract signed after the acquisition, which makes those losses recoverable. Which treatment applies?L4
• The Silvadore group acquired Trelmont on 1 July 20X5 (twelve-month measurement period, case data). At 31 December 20X5: (1) Trelmont's expected profits make Silvadore's own losses recoverable; (2) a tax review reveals tax credits of Trelmont that existed at 1 July and were overlooked at the acquisition; (3) the deferred tax liability on the remeasurement of Trelmont's land was omitted. Write a memo stating, for each point, the other side of the deferred tax, distinguishing the rule of the standard, case data and judgement.L4
• The Uvrelac group acquires Valquessa. In which of these situations does the combination give rise to a temporary difference on an acquired identifiable asset?L3