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Other transactions requiring special considerations include fresh start accounting and the transfer of assets other than cash as part of the consideration in a business combination.

10.11.1 Fresh start accounting

A company emerging from bankruptcy should prepare its financial statements in accordance with ASC 852, Reorganizations (i.e., “fresh-start” accounting). Refer to BLG 4.4.7 in PwC’s guide to Bankruptcies and liquidations for additional guidance on the topic.

10.11.2 Exchanges of assets between companies

An acquirer may transfer assets other than cash as part of the consideration transferred in a business combination. The difference between the fair value and the carrying value of the transferred asset is recognized as a gain or loss in earnings unless the assets remain in the combined group (as discussed in BCG 2.6.3.2).
The tax consequences to the acquirer from transferring assets as part of consideration paid are recorded in the acquirer’s financial statements outside of acquisition accounting. However, sometimes the transfer is tax-free, in which case no income tax effect is recorded. Example TX 10-26 illustrates the income tax accounting for a tax-free transfer of an equity interest in exchange for control of a subsidiary.
EXAMPLE TX 10-26
Income tax accounting for a tax-free transfer of an equity interest in exchange for control of a subsidiary
Entity X owns 15% of Entity Y, which is a private enterprise. Entity Y’s securities do not have a readily determinable fair market value. As a result, Entity X appropriately elects to account for its investment at cost less impairment. The two companies enter into an agreement whereby Entity Y exchanges a wholly owned subsidiary (Sub S) in return for Entity X’s 15% ownership interest in Entity Y.
Both the carrying value and the tax basis of Entity X’s investment in Entity Y is $300. The fair value is $1,000. The fair value of Sub S is less than the fair value of the Entity Y shares held by Entity X. Therefore, Entity Y infuses cash into Sub S just prior to the exchange to equalize the value. After the cash infusion, the fair value of Sub S is $1,000. The fair value of Sub S’s identifiable assets and liabilities is $700. The tax bases of the assets and liabilities are equal to $500.
The exchange of Entity X’s investment in Entity Y for Entity Y’s investment in Sub S is tax-free. Entity X’s tax basis in its investment in Entity Y ($300) will become Entity X’s tax basis in its investment in Sub S. There is no uncertainty relative to the tax-free nature of the transaction.
After the transaction, Entity X has the intent and ability to recover its investment in Sub S in a tax-free liquidation and therefore will not record a deferred tax liability for any resulting book-over-tax outside basis difference in its investment in Sub S. Entity X’s tax rate is 25%.
How should Entity X record the tax-free transfer of its equity interest in Entity Y?
Analysis
Entity X would record the following entries in acquisition accounting:
Dr. Net assets
$700
Dr. Goodwill
$350
      Cr. Deferred tax liability
$50
      Cr. Gain on investment
$700
      Cr. Investment in Entity Y
$300
There would be no tax consequence from the exchange of Entity X’s investment in Entity Y for Entity Y’s investment in Sub S. Therefore, the gain from transferring the investment in Entity Y would impact Entity X’s effective tax rate in the amount of $175 ($700 x 25%) as a favorable permanent adjustment.
1 Fair value of the identifiable assets and liabilities of Sub S
2 Goodwill is calculated as the residual after recording the identifiable net assets acquired and associated deferred tax assets and liabilities ($1,000 – ($700 – $50)).
3 The deferred tax liability is calculated as the difference between the book bases of the identifiable net assets acquired and the carryover tax bases at the applicable tax rate (($700 – $500) × 25%).
4 The gain on investment is the difference between the fair value and the carrying value of Entity X’s investment in Entity Y ($1,000 – $300).
5 Carrying value of Entity X’s investment in Entity Y.
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