Strategic Business Reporting (International) · Income taxes

Deferred Tax in Group Accounts and Business Combinations (IAS 12)

Updated 11 October 2026 · Fact-checked

Deferred tax in group accounts is IAS 12 applied to consolidation adjustments. Compare the carrying amount in the consolidated statements with the tax base for each asset and liability, and tax the temporary difference at the rate expected to apply. Adjust goodwill for acquisition-date deferred tax, and tax unremitted profits only if reversal is likely.

Understand Deferred Tax in Group Accounts and Business Combinations

IAS 12 uses the temporary difference approach. A temporary difference is the gap between an item's carrying amount and its tax base. In group accounts, consolidation adjustments change carrying amounts but usually not tax bases. So they create new temporary differences that do not exist in the individual entity accounts.

The main sources are: fair value uplifts on acquisition, unrealised intragroup profit, undistributed profits of subsidiaries and associates, and goodwill. Each follows its own rule. Work through them one at a time.

Fair value adjustments. If you uplift a subsidiary's asset to fair value, the tax authority normally still taxes the old cost basis. The tax base stays the same, so a taxable temporary difference arises. You recognise a deferred tax liability (DTL). The other side of the entry goes into goodwill, because the DTL is a liability assumed at acquisition under IFRS 3. A higher net liability means higher goodwill. Later movements in that DTL go to profit or loss as the asset is depreciated.

Goodwill. Goodwill is a residual. A DTL on the taxable temporary difference arising from goodwill itself is not recognised. IAS 12 prohibits it because it would increase goodwill, which would then increase the DTL again. Any tax-deductible goodwill is a separate matter and is dealt with by comparing tax base and carrying amount. Note that the DTL on fair value adjustments is recognised, even though it enlarges goodwill.

Unremitted profits. A parent recognises a DTL on temporary differences linked to investments in subsidiaries, branches, associates and joint arrangements. The exception is when the parent controls the timing of reversal and it is probable that the difference will not reverse in the foreseeable future. For an associate, the investor usually cannot control dividend policy alone. So a DTL is normally recognised unless there is an agreement that profits will not be distributed.

Unrealised profit. When one group company sells inventory to another, the profit is eliminated on consolidation. The buyer's tax base is its purchase price, since the seller has already been taxed. The group carrying amount is lower. That gives a deductible temporary difference, so a deferred tax asset (DTA) arises, at the buyer's tax rate. A DTA needs probable future taxable profit.

Key rules to remember

Temporary difference: Temporary difference = Carrying amount − Tax base; For assets, a positive result is taxable (DTL). A negative result is deductible (DTA). For liabilities, the signs reverse.
Deferred tax balance: Deferred tax = Temporary difference × tax rate enacted or substantively enacted for the period of reversal; Never discount deferred tax. Use the rate of the jurisdiction where the entity pays tax.
Fair value uplift on acquisition: DTL = (Fair value − Tax base) × tax rate; Dr Goodwill, Cr Deferred tax liability; The DTL increases goodwill. Later releases go to profit or loss as the asset is depreciated.
Goodwill rule: No deferred tax on the initial recognition of goodwill itself; Applies to the taxable temporary difference from goodwill. DTL on fair value adjustments is still recognised.
Unrealised intragroup profit: DTA = Unrealised profit × buyer's tax rate; Dr Deferred tax asset, Cr Consolidated tax expense (or the seller's reserves, as the adjustment follows the profit elimination). Recognise only if recoverable.
Unremitted profits (IAS 12.39): DTL = Undistributed profit expected to reverse × applicable tax rate on remittance; No DTL if the parent controls the timing and reversal is not probable in the foreseeable future. For associates, the DTL is usually required.

How to solve Deferred Tax in Group Accounts and Business Combinations questions

Use this method for any group deferred tax question. It keeps the double entry straight and stops you missing items.

1List every consolidation adjustment in the question: fair value uplifts, unrealised profit, goodwill, fair value of liabilities and any undistributed profits.
2For each item, state the carrying amount in the group accounts and the tax base. Do not change the tax base unless the question says tax law follows the fair value.
3Work out the temporary difference and decide whether it is taxable (DTL) or deductible (DTA).
4Check the exemptions: the goodwill initial recognition exception, and the parent's control over reversal for investments.
5Apply the correct tax rate. Use the rate of the entity that will pay or recover the tax, and the rate expected on reversal.
6Post the double entry. At acquisition, the other side is goodwill. After acquisition, it is profit or loss, or OCI if the item itself went through OCI.
7Recompute goodwill and non-controlling interest (NCI) if the DTL changes net assets at acquisition. NCI at proportionate share takes its share of the lower net assets.
8Finish with a one-line comment on judgement, such as recoverability of the DTA or whether reversal is probable.

Quickest way: Table of adjustments

When to use it: Use it when the question has several adjustments and limited time.

Draw a three-column table: item, temporary difference, deferred tax.
Fill each row quickly: fair value uplift gives DTL; unrealised profit gives DTA; goodwill gives nil; dividends gives DTL if probable.
Mark the other side of each entry: goodwill, retained earnings, or tax expense.
Recompute goodwill once, with all deferred tax adjustments included.
Write a short narrative for each row, since marks are given for explanation.

Common mistakes in Deferred Tax in Group Accounts and Business Combinations

Recognising deferred tax on goodwill itself.
Goodwill is an asset with no tax base, so it looks like a temporary difference.
Fix: Remember the initial recognition exception for goodwill. Only the DTL on fair value uplifts is recognised.
Not adjusting goodwill for the DTL on fair value uplifts.
Students book the DTL against profit or loss because deferred tax usually does.
Fix: At acquisition the DTL reduces net assets, so goodwill goes up. Later releases go to profit or loss.
Using the parent's tax rate for unrealised profit.
Consolidation is done in the parent's books, so its rate feels right.
Fix: Use the tax rate of the company that holds the inventory (the buyer), since that is where the difference reverses.
Ignoring the parent's control over unremitted profits.
Students apply a fixed rule rather than the IAS 12 condition.
Fix: State both conditions: the parent controls timing and reversal is not probable in the foreseeable future. If either fails, recognise a DTL.
Treating associates like subsidiaries for unremitted profits.
Both are investments, so the same rule seems to apply.
Fix: An investor in an associate usually does not control dividend policy. A DTL is normally recognised unless an agreement prevents distribution.

Worked examples

Example 1

On 1 April 20X5, Parent acquired 80% of Sub for $5,000,000. Sub's land had a carrying amount and tax base of $1,000,000 and a fair value of $1,600,000. Sub's net assets at fair value before deferred tax were $4,000,000 including the land uplift. NCI is measured at its proportionate share of net assets. The tax rate is 25%. Calculate the deferred tax on the uplift and the goodwill.

Show the solution

Temporary difference = $1,600,000 − $1,000,000 = $600,000. The tax base is unchanged, so this is taxable.
DTL = $600,000 × 25% = $150,000.
Net assets at acquisition = $4,000,000 − $150,000 = $3,850,000.
NCI = 20% × $3,850,000 = $770,000.
Goodwill = $5,000,000 + $770,000 − $3,850,000 = $1,920,000.
Without the DTL, goodwill would be $5,000,000 + $800,000 − $4,000,000 = $1,800,000 for the same other inputs. The DTL has increased goodwill by $120,000. That is the parent's 80% share of $150,000, and the NCI share of $30,000 is in NCI.

Answer: DTL is $150,000. Goodwill is $1,920,000 and NCI at acquisition is $770,000. No deferred tax is recognised on goodwill itself.

Example 2

Parent sold inventory to its 100% subsidiary Sub for $800,000. It cost Parent $600,000. At the year end, half of the inventory is still held by Sub. Sub's tax rate is 30% and Parent's is 20%. Sub is expected to have taxable profits. Calculate the consolidation adjustments for unrealised profit and deferred tax.

Show the solution

Total profit = $800,000 − $600,000 = $200,000.
Unrealised profit in closing inventory = $200,000 × 50% = $100,000.
Consolidation adjustment: Dr Cost of sales (or retained earnings) $100,000, Cr Inventory $100,000.
In the group accounts the inventory carrying amount is $100,000 lower than the tax base in Sub, which is based on its purchase price. This is a deductible temporary difference of $100,000.
Use Sub's rate because Sub holds the inventory and will get the deduction when it sells. DTA = $100,000 × 30% = $30,000.
Entry: Dr Deferred tax asset $30,000, Cr Tax expense (consolidated) $30,000.
The net effect on group profit is a reduction of $100,000 − $30,000 = $70,000.

Answer: Inventory is reduced by $100,000. A DTA of $30,000 is recognised at Sub's rate of 30%, provided it is recoverable. Group profit falls by $70,000.

Exam tips

Read the scenario for tax bases. If tax law taxes assets at fair value, there is no temporary difference. Say so.
Always give the reason for the double entry, such as why goodwill changes. Examiners reward explanation.
For unremitted profits, quote the two IAS 12 conditions and apply them to the facts about control and dividend policy.
Check for a DTA recoverability point. If the buyer is loss-making, say a DTA may not be recognised.
In professional skills marks, show analysis. Link the deferred tax issue to its effect on group gearing, profit and goodwill, and explain it plainly.

Practice questions from Income taxes

Deferred Tax in Group Accounts and Business Combinations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deferred Tax in Group Accounts and Business Combinations: frequently asked questions

Why does the deferred tax on a fair value uplift change goodwill?

The DTL is a liability assumed at acquisition under IFRS 3, so it reduces identifiable net assets. Goodwill is the residual, so it rises by the amount of the DTL. After acquisition, releases of the DTL go to profit or loss.

Is deferred tax recognised on goodwill?

Not for the initial recognition of goodwill itself, under IAS 12. This stops goodwill and the DTL growing each other. Deferred tax on fair value adjustments is recognised.

When do you recognise deferred tax on a subsidiary's unremitted profits?

Recognise a DTL unless the parent controls the timing of the reversal and it is probable the difference will not reverse in the foreseeable future. Where dividends are planned, or tax is payable on remittance, a DTL is needed.

Which tax rate applies to unrealised profit in inventory?

Use the rate of the group company holding the inventory, as that is where the tax deduction will arise when it is sold outside the group.