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ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes

Alpha acquires 100% of Beta. At the acquisition date, an item of plant in Beta has a fair value of $900,000 and a carrying amount and tax base of $700,000. The tax rate is 25%. How should Alpha treat the fair value uplift in the consolidated financial statements at acquisition?

A deferred tax liability of $50,000 (25% of the $200,000 uplift) is recognised on acquisition. It forms part of the identifiable net assets acquired, so it increases goodwill rather than being charged to profit or loss, because the carrying amount exceeds the unchanged tax base.

  1. ARecognise a deferred tax liability of $50,000, which increases the goodwill arising on acquisitionCorrect
  2. BRecognise a deferred tax liability of $50,000 as an expense in consolidated profit or loss
  3. CRecognise no deferred tax because the uplift arises on consolidation, not in the individual entity
  4. DRecognise a deferred tax asset of $50,000, which reduces goodwill

Explanation

The fair value uplift is $200,000 and the tax base is unchanged, so a taxable temporary difference of $200,000 arises. At 25% this gives a deferred tax liability of $50,000. Under IAS 12 it is recognised as part of the acquired net assets, so goodwill increases rather than a charge to profit or loss. Ignoring it is wrong because IAS 12 requires deferred tax on fair value adjustments.

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