Acquired subsidiary accounted for as asset purchase
An entity (P) acquires a subsidiary (S), whose only asset is a property, for $10 million. The transaction is accounted for as the acquisition of a property rather than as a business combination. The tax base of the property is $4 million and its carrying value in the financial statements of S (under IFRS) is $6 million. The taxable temporary difference of $2 million in the financial records of S arose after the initial recognition by S of the property, and accordingly a deferred tax liability of $800,000 has been recognised by S at its tax rate of 40%.
The question then arises as to whether any deferred tax should be recognised for the property in the financial statements of P.
One view would be that the initial recognition exception applies to the entire $6 million difference between the carrying value of the property of $10 million and its tax base of $4 million, in exactly the same way as if the property had been legally acquired as a separate asset rather than through acquisition of the shares of S. Under this approach, no deferred tax is recognised by P in respect of the property at the time of acquisition.
An alternative view might be that, although the acquisition of S is being treated as an asset acquisition rather than a business combination under IFRS 3, IFRS 10 still requires P to consolidate S, and therefore to record the assets and liabilities (according to IFRS) of S in its consolidated financial statements. The deferred tax of $800,000 recognised by S should therefore be included in the financial statements of P. Under this approach, at the time of acquisition, the initial recognition exception applies only to the valuation uplift from $6 million to $10 million.
In our view, either analysis is acceptable, but should be applied consistently to similar transactions.