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

Corvin Co has an acquired subsidiary. On acquisition, a brand was fair valued at $12m in the consolidated financial statements, but its tax base in the subsidiary's own records is nil and no tax deduction is available on it. The tax rate is 20%. How does IAS 12 and IFRS 3 affect the consolidated accounting on acquisition?

Recognise a deferred tax liability of $2.4m, being $12m multiplied by 20%, and increase goodwill by the same amount. The deferred tax arises on a fair value adjustment in the acquisition, so it reduces identifiable net assets and increases goodwill.

  1. ARecognise a deferred tax liability of $2.4m and increase goodwill by $2.4mCorrect
  2. BRecognise a deferred tax liability of $2.4m and charge it to profit or loss
  3. CRecognise no deferred tax because the brand has an indefinite life
  4. DRecognise a deferred tax liability of $2.4m and reduce goodwill by $2.4m

Explanation

The fair value uplift creates a taxable temporary difference of $12m, giving a deferred tax liability of $12m x 20% = $2.4m. In a business combination the deferred tax arising on fair value adjustments is part of the net assets acquired, so goodwill increases by $2.4m. Charging profit or loss is wrong because the item arises on acquisition accounting.

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