11.4 Accounting for Uncertainty in Income Taxes in Business Combinations
Uncertain tax positions related to a business combination and subsequent changes to
those positions require special consideration under ASC 805 during the initial
measurement period and after a business combination.
ASC 805-740
Other Presentation Matters
45-1
This Section addresses how an acquirer recognizes changes in
valuation allowances and tax positions related to an
acquisition and the accounting for tax deductions for
replacement awards.
Changes in Tax Positions
45-4
The effect of a change to an acquired tax position, or those
that arise as a result of the acquisition, shall be
recognized as follows:
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Changes within the measurement period that result from new information about facts and circumstances that existed as of the acquisition date shall be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, the remaining portion of that adjustment shall be recognized as a gain on a bargain purchase in accordance with paragraphs 805-30-25-2 through 25-4.
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All other changes in acquired income tax positions shall be accounted for in accordance with the accounting requirements for tax positions established in Subtopic 740-10.
The recognition and measurement guidance in ASC 740 is applicable to a business
combination accounted for in accordance with ASC 805. ASC 805-740-25-5 states, “The
tax bases used in the calculation of deferred tax assets and liabilities as well as
amounts due to or receivable from taxing authorities related to prior tax positions
at the date of a business combination shall be calculated in accordance with
Subtopic 740-10.” In addition, the effect of subsequent changes to acquired
uncertain tax positions established in the business combination should be recorded
in accordance with the presentation and classification guidance in ASC 740 unless
that change relates to new information about facts and circumstances that existed as
of the acquisition date and occurs within the measurement period (as described in
ASC 805-10-25-13 through 25-19).
The measurement period applies to the potential tax effects of (1) uncertainties
associated with temporary differences and carryforwards of an acquired entity that
exist as of the acquisition date in a business combination or (2) income tax
uncertainties related to a business combination (e.g., an uncertainty related to the
tax basis of an acquired asset that will ultimately be agreed to by the tax
authority) acquired or arising in a business combination.
ASC 805-740-45-4(a) states that if the change occurs in the measurement period and
relates to “new information about facts and circumstances that existed as of the
acquisition date,” it is reflected with a “corresponding adjustment to goodwill.”
However, if goodwill is reduced to zero, the remaining portion will be reflected as
a bargain purchase gain.
If the adjustment to the acquired tax position balance directly results from an event
that occurred after the business combination’s acquisition date, regardless of
whether the adjustment is identified during or after the measurement period, the
entire adjustment is recognized as an adjustment to income tax expense in accordance
with ASC 740 and is not an adjustment to goodwill.
After the measurement period, changes in the acquired tax position balances because
of additional information about facts and circumstances that existed as of the
acquisition date would need to be assessed to determine whether the adjustment is a
correction of an error.
11.4.1 Changes in Uncertain Income Tax Positions Acquired in a Business Combination
Before ASC 805 (formerly FASB Statement 141(R)), the acquirer generally recorded subsequent adjustments to uncertain tax positions arising from a business combination through goodwill, in accordance with EITF Issue 93-7, regardless of
whether such adjustments occurred during the allocation period or thereafter. If
goodwill attributable to the acquisition was reduced to zero, the acquirer then
reduced other noncurrent intangible assets related to that acquisition to zero
and recorded any remaining credit as a reduction of income tax expense.
An acquirer must record all changes to acquired uncertain tax positions arising from a business combination consummated before the adoption of Statement 141(R)
in accordance with ASC 805-740-45-4, which requires that changes to an acquired
tax position, or those that arise as a result of the acquisition (other than
changes occurring during the measurement period that are related to facts and
circumstances as of the acquisition date), be accounted for in accordance with
ASC 740-10 (generally as an adjustment to income tax expense).