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Chapter 11 — Business Combinations

11.3 Recognition and Measurement of Temporary Differences Related to Identifiable Assets Acquired and Liabilities Assumed

11.3 Recognition and Measurement of Temporary Differences Related to Identifiable Assets Acquired and Liabilities Assumed

As noted in Section 11.1, the recognition principle and the measurement principle of ASC 805 require an entity to “recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree” and to measure “the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.” These recognition and measurement principles may differ for financial reporting and tax purposes (i.e., an asset may be recorded at fair value for book purposes versus at carryover basis for tax purposes). In both taxable and nontaxable business combinations, DTAs and DTLs might need to be recorded for any deductible and taxable temporary differences (i.e., basis differences) that arise in connection with the accounting for the business combination or asset acquisition. The sections below discuss how to account for basis differences resulting from a business combination and provide examples of common scenarios in which additional considerations are necessary.

Footnotes

2
In the calculation of deferred taxes in this example, it is assumed that allocation is consistent with Approach 2 described in Section 11.3.2.2.
3
Once effective, ASU 2017-04 amends ASC 350-20-40-7 to refer to ASC 350-20-35-3A through 35-13 rather than ASC 350-20-35-3A through 35-19. ASU 2017-04, which eliminates step 2 from the goodwill impairment test, supersedes ASC 350-20-35-14 through 35-19. Entities that have early adopted the amendments in ASU 2017-04 should refer to the updated guidance.
4
Once effective, ASU 2017-04 amends ASC 350-20-35-1 to state that “goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit” (emphasis added). While ASC 350-20-35-1 is amended, as described above, the requirement under ASC 350-20-35-28 to test goodwill at least annually did not change.
6
The approach an entity selects is an accounting policy election that, like all such elections, should be applied consistently.
8
Entities should not use this example as a basis for recording an indemnification receivable since they would need additional facts to reach such a conclusion. Rather, entities must evaluate their own facts and circumstances and use significant judgment when determining the appropriateness of such a receivable. Any receivable recorded should be adjusted to reflect collection risk as appropriate.
9
Rule 5-03 applies to commercial and industrial companies only; however, Regulation S-X, Rules 6-07 and 7-04, provide similar guidance and apply to registered investment companies and insurance companies, respectively.