Deferred taxes in a business combination

Learning objectives

• Calculate the deferred tax arising from a fair value adjustment that exceeds the tax base, using the rate given in the case.L2, L3
• Analyse the effect of the deferred tax recognised on the amount of goodwill or of the bargain purchase gain.L2, L3

Normative references

• IFRS 3 §24Exception for income taxes: the acquirer recognises and measures in accordance with IAS 12 the deferred tax assets and liabilities arising from the assets acquired and liabilities assumed (para. 24), as well as the potential tax effects of temporary differences and carryforwards existing at the acquisition date or arising as a result of the acquisition (para. 25). These deferred taxes form part of the identifiable net assets and therefore change, by calculation, goodwill or the bargain purchase gain (para. 32).

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

3 questions

• On acquiring Aubrac SA, a building is recognised at a fair value of {fv_building}; its tax base remains {tax_base}. Case convention: the applicable tax rate is {tax_rate}, and the difference is a taxable temporary difference, fully recognised. Calculate the deferred tax liability recognised in the business combination.L2
• At the acquisition date, Garonne SA recognised a machine of the acquiree at a fair value {uplift} above its tax base. Case convention: the applicable tax rate is {tax_rate}, the difference is a taxable temporary difference and the entry is made at business combination level, against goodwill. Record the deferred tax entry.L3
• In a purchase price allocation file, the analyst at Lys SA notes a fair value uplift of 400,000 on an acquired building whose tax base is lower, but recognises no deferred tax and calculates goodwill on that basis. What is the error?L2