Temporary differences associated with subsidiaries, branches, associates and joint arrangements
On 1 January 2013 entity H acquired 100% of the shares of entity S, whose functional currency is different from that of H, for €600m. The tax rate in H’s tax jurisdiction is 30% and the tax rate in S”s tax jurisdiction is 40%.
The fair value of the identifiable assets and liabilities (excluding deferred tax assets and liabilities) of S acquired by H is set out in the following table, together with their tax base in S’s tax jurisdiction and the resulting temporary differences (all figures in € millions).
|
Fair value |
Tax base |
(Taxable)/ deductible ternponuy difference |
|
|
PP&E |
270 |
155 |
(115) |
|
Accounts receivable |
210 |
210 |
|
|
Inventory |
174 |
124 |
(50) |
|
Retirement benefit obligations |
(30) |
30 |
|
|
Accounts payable |
(120) |
(120) |
|
|
Fair value of net assets acquired excluding deferred tax |
504 |
369 |
(135) |
|
Deferred tax (135 @ 40%) |
(54) |
||
|
Fair value of identifiable assets acquired and liabilities assumed |
450 |
||
|
Goodwill (balancing figure) |
150 |
||
|
Carrying amount |
600 |
No deferred tax is recognised on the goodwill, in accordance with the requirements of IAS 12 as discussed at 7.2.2.A above.
At the date of combination, the tax base, in H’s tax jurisdiction, of H’s investment in S is €600 million. Therefore, in H”s jurisdiction, no temporary difference is associated with the investment, either in the consolidated financial statements of H (where the investment is represented by net assets and goodwill of €600 million), or in its separate financial statements, if prepared (where the investment is shown as an investment at cost of €600 million).
During 2013:
- S makes a profit after tax, as reported in H”s consolidated financial statements, of €150 million, of which €80 million is paid as a dividend (after deduction of withholding tax) before 31 December 2013, leaving a net retained profit of €70 million.
- In accordance with IAS 21 – The Effects of Changes in Foreign Exchange Rates, H”s consolidated financial statements record a loss of €15 million on retranslation to the closing exchange rate of S”s opening net assets and profit for the period.
- In accordance with IAS 36 – Impairment of Assets, H”s consolidated financial statements record an impairment loss of €10 million in respect of goodwill.
Thus in H”s consolidated financial statements the carrying value of its investment in S is €645 million, comprising:
|
εm |
|
|
Carrying amount at 1.1.2013 |
600 |
|
Retained profit |
70 |
|
Exchange loss |
(15) |
|
Impairment of goodwill |
(10) |
|
Carrying amount at 31.12.2013 |
645 |