Tax deduction for acquisition costs under ‘old’ IFRS 3
Entity A, which pays tax at 40%, acquired 100% of Entity B for €1,000,000 on 1 January 2009. In addition A bore transaction costs, such as professional fees, of €50,000 so that the total purchase price recorded by A for B was €1,050,000. The transaction costs were deductible for tax purposes in the year ended 31 December 2009, so that A received a current tax credit of €20,000 as a result of the transaction costs.
The tax base of the investment in B is €1,000,000, and, if it were sold, any gain arising would be taxable.
In the separate financial statements of A, the carrying amount of the investment in B is €1,050,000. In the consolidated financial statements of A, the net assets of and goodwill of B are carried at €1,050,000 (i.e. the transaction costs represent €50,000 of the goodwill recognised).
A has received a tax deduction of €20,000 (€50,000 @ 40%) in the period and so must record current tax income of this amount.
The issue then arises as to how to deal with the taxable temporary difference of €50,000 associated with the carrying amount of the net assets and goodwill of the investment (cost €1,050,000 less tax base €1,000,000).
One view might be that, in financial reporting terms, this temporary difference relates to the goodwill into which the transaction costs have been subsumed. This temporary difference did not arise on the initial recognition of goodwill since it results from the claiming of a tax deduction after the transaction costs had been incurred recognised in the financial statements. Therefore, a deferred tax liability is required to be recognised (see above).
An alternative analysis would be that as no deduction is received for an item described as ‘goodwill’ in the tax return, the temporary difference should not be regarded as relating specifically to the goodwill. Rather it is an example of the more general category of differences associated with the carrying amount of an investment in a subsidiary (see above). Therefore, a deferred tax liability should be recognised, but subject to the exemptions from recognising such liabilities discussed in 7.5 above.