FAQs on Deferred tax in a business combination : 13-07-2018

1. Deferred tax in a business combination transaction

Query: Can deferred tax arise in a business combination?

Reply: Yes. In a business combination, assets acquired and liabilities assumed are recorded at their fair value. So, temporary differences arise when the tax base of those assets and liabilities remain same even after the business combination. For example, accounting base of an asset increases to its fair value after business combination, but the tax base of that asset remains at cost to the previous owner.

2. Deferred tax asset on goodwill

Query: Whether deferred tax be created on goodwill?

Reply: Ind AS 12, Income Taxes restricts creation of deferred tax liability on goodwill. However, deferred tax asset should be created when the carrying amount of goodwill is less than its tax base. The deferred tax asset arising from the initial recognition of goodwill shall be recognised as part of the accounting for a business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary differences could be adjusted while calculating taxable profit for future periods.

3. Measurement of deferred tax

Query: How the amount of deferred tax asset or liability would be measured?

Reply:Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Source : Economic Times

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