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

Kappa Group acquired 100% of Sigma on 1 January. Sigma's net assets had a carrying amount and tax base of $2,000,000. A building within them had a fair value $400,000 above carrying amount, with no change to its tax base. The tax rate is 30%. Ignoring goodwill-related deferred tax, what is the effect of the deferred tax arising on this fair value adjustment in the consolidation at acquisition?

A deferred tax liability of $120,000 is recognised and goodwill increases by the same amount. The fair value uplift of $400,000 has no matching tax base increase, creating a taxable temporary difference taxed at 30%. The liability reduces identifiable net assets acquired, so it is absorbed into goodwill rather than profit or loss.

  1. ADeferred tax liability of $120,000 recognised, increasing goodwillCorrect
  2. BDeferred tax liability of $120,000 recognised, charged to profit or loss
  3. CNo deferred tax recognised because the difference arose on a business combination
  4. DDeferred tax asset of $120,000 recognised, reducing goodwill

Explanation

The fair value uplift creates a taxable temporary difference of 400,000. Deferred tax liability = 400,000 x 30% = 120,000. It reduces the fair value of identifiable net assets acquired, so goodwill increases by 120,000. It is not charged to profit or loss at acquisition, and IAS 12 gives no business combination exemption for this.

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