11.8 Asset Acquistions

25-49 The following guidance addresses the accounting when an asset is acquired outside of a business combination and the tax basis of the asset differs from the amount paid.

25-50 The tax basis of an asset is the amount used for tax purposes and is a question of fact under the tax law. An asset’s tax basis is not determined simply by the amount that is depreciable for tax purposes. For example, in certain circumstances, an asset’s tax basis may not be fully depreciable for tax purposes but would nevertheless be deductible upon sale or liquidation of the asset. In other cases, an asset may be depreciated at amounts in excess of tax basis; however, such excess deductions are subject to recapture in the event of sale.

25-51 The tax effect of asset purchases that are not business combinations in which the amount paid differs from the tax basis of the asset shall not result in immediate income statement recognition. The simultaneous equations method shall be used to record the assigned value of the asset and the related deferred tax asset or liability. (See Example 25, Cases A and B [paragraphs 740-10-55-171 through 55-182] for illustrations of the simultaneous equations method.) For purposes of applying this requirement, the following applies:

1. An acquired financial asset shall be recorded at fair value, an acquired asset held for disposal shall be recorded at fair value less cost to sell, and deferred tax assets shall be recorded at the amount required by this Topic.
2. An excess of the amounts assigned to the acquired assets over the consideration paid shall be allocated pro rata to reduce the values assigned to noncurrent assets acquired (except financial assets, assets held for disposal, and deferred tax assets). If the allocation reduces the noncurrent assets to zero, the remainder shall be classified as a deferred credit. (See Example 25, Cases C and D [paragraphs 740-10-55-183 through 55-191] for illustrations of transactions that result in a deferred credit.) The deferred credit is not a temporary difference under this Subtopic.
3. A reduction in the valuation allowance of the acquiring entity that is directly attributable to the asset acquisition shall be accounted for in accordance with paragraph 805-740-30-3. Subsequent accounting for an acquired valuation allowance (for example, the subsequent recognition of an acquired deferred tax asset by elimination of a valuation allowance established at the date of acquisition of the asset) would be in accordance with paragraphs 805-740-25-3 and 805-740-45-2.

25-52 The net tax benefit (that is, the difference between the amount paid and the deferred tax asset recognized) resulting from the purchase of future tax benefits from a third party which is not a government acting in its capacity as a taxing authority shall be recorded using the same model described in the preceding paragraph. (See Example 25, Case F [paragraph 740-10-55-199] for an illustration of a purchase of future tax benefits.)

25-53 Transactions directly between a taxpayer and a government (in its capacity as a taxing authority) shall be recorded directly in income (in a manner similar to the way in which an entity accounts for changes in tax laws, rates, or other tax elections under this Subtopic). (See Example 26 [paragraph 740-10-55-202] for an illustration of a transaction directly with a governmental taxing authority.)

25-54 An entity shall determine whether a step up in the tax basis of goodwill relates to the business combination in which the book goodwill was originally recognized or whether it relates to a separate transaction. In situations in which the tax basis step up relates to the business combination in which the book goodwill was originally recognized, no deferred tax asset would be recorded for the increase in basis except to the extent that the newly deductible goodwill amount exceeds the remaining balance of book goodwill. In situations in which the tax basis step up relates to a separate transaction, a deferred tax asset would be recorded for the entire amount of the newly created tax goodwill in accordance with this Subtopic. Factors that may indicate that the step up in tax basis relates to a separate transaction include, but are not limited to, the following:

1. A significant lapse in time between the transactions has occurred.
2. The tax basis in the newly created goodwill is not the direct result of settlement of liabilities recorded in connection with the acquisition.
3. The step up in tax basis is based on a valuation of the goodwill or the business that was performed as of a date after the business combination.
4. The transaction resulting in the step up in tax basis requires more than a simple tax election.
5. The entity incurs a cash tax cost or sacrifices existing tax attributes to achieve the step up in tax basis.
6. The transaction resulting in the step up in tax basis was not contemplated at the time of the business combination.

25-55 Paragraph superseded by Accounting Standards Update No. 2018-09.

S25-1 See paragraph 740-10-S99-3, SEC Observer Comment: Accounting for Acquired Temporary Difference in Certain Purchase Transactions that Are Not Accounted for as Business Combinations, for SEC Staff views on accounting for such transactions.

S99-3 The following is the text of SEC Observer Comment: Accounting for Acquired Temporary Differences in Certain Purchase Transactions that Are Not Accounted for as Business Combinations.

35-5 A deferred credit may arise under the accounting required by paragraph 740-10-25-51 when an asset is acquired outside of a business combination. Any deferred credit arising from the application of such accounting requirements shall be amortized to income tax expense in proportion to the realization of the tax benefits that gave rise to the deferred credit.