Business combinations and income tax loss carryforwards of the acquiree
On Dec 31, 01, entity E acquires 100% of the shares of entity S for CU 100. S is free of debt.
A simplified illustration of S”s statement of financial position as at Dec 31, 01 is presented below. For simplification purposes it is assumed that it is identical with S”s statement of financial position II as at the same date.
|
Various assets |
90 |
Share capital |
70 |
|
Retained earning |
20 |
||
|
Total |
90 |
Total |
90 |
The value of the assets of S on acquisition date determined according to IFRS 3 is CU 95. Moreover, S owns income tax loss carryforwards amounting to CU 40 that do not meet the recognition criteria when the business combination is initially accounted for as at Dec 31, 01.
Version (a)
On Dec 31, 02, new information about facts and circumstances that existed at the acquisition date indicates that the recognition criteria for the income tax loss carryforwards were met on the acquisition date.
Version (b)
On Dec 31, 02, the recognition criteria are met due to a significant improvement in S”s performance after acquisition date.
In its separate financial statements E accounts for its investment in S (shares) at cost (IAS 27.38a).
Posting status (in E”s separate financial statements):
|
Ded 31,01 |
Dr |
Investment of E in S (shares) |
100 |
|
|
Cr |
Cash |
100 |
Posting status (capital consolidation in E”s consolidated financial statements):
|
31-Dec-01 |
Dr |
Goodwill |
5 |
|
|
Dr |
Various assets of S |
5 |
||
|
Dr |
Share capital |
70 |
||
|
Dr |
Retained earnings |
20 |
||
|
Cr |
Investment of E in S (Shares) |
100 |
Required
Prepare any necessary entries in E”s consolidated financial statements as at Dec 31, 02 regarding deferred tax. The tax rate is 25%.
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