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10.1 Chapter overview—income tax accounting for acquisitions
Publication date: 31 Mar 2023
us Income taxes guide
Business combinations often give rise to a variety of complicated issues when accounting for income taxes under ASC 740, Income Taxes. This chapter primarily focuses on the accounting for the income tax effects of business combinations. However, accounting for the income tax effects of an acquisition that does not qualify as a business combination is discussed in TX 10.12. Further information regarding the accounting for business combinations and accounting for transactions with noncontrolling interests can be found in the PwC publication, Business combinations and noncontrolling interests. Further information regarding the accounting for acquisitions that do not qualify as a business combination can be found in PwC’s guide to Property, plant, equipment and other assets (see PPE 2).
Under ASC 805, Business Combinations, assets and liabilities acquired are accounted for at fair value. However, tax accounting associated with a business combination follows the guidance in ASC 740. In accordance with ASC 740, the acquirer should account for the potential tax effects of an acquiree’s temporary differences associated with assets acquired and liabilities assumed, carryforwards, and income tax uncertainties that exist at the acquisition date or that arise as a result of the acquisition.
This chapter is structured to follow the process that would typically be completed in analyzing the income tax implications of a business combination. The following highlights the steps in the process that are generally performed:
- Determine the tax structure of the transaction and tax status of the entities involved in the business combination. Determine the legal structure and the tax status of the entities acquired (e.g., corporate entities, partnerships, limited liability corporations), and determine the tax structure of the transaction (i.e., taxable or nontaxable). In a taxable transaction, the tax bases of the assets acquired and liabilities assumed generally are adjusted to fair value based on the rules of the specific tax jurisdiction. In a nontaxable transaction, the historical tax bases of the assets and liabilities, net operating losses, and other tax attributes of the target generally carry over to the acquirer. See further discussion of the differences in the two structures in TX 10.2.
- Determine financial statement and tax bases of the assets acquired and liabilities assumed. ASC 805 requires the acquired net assets to be recorded at fair value, with certain exceptions. The tax bases of the identifiable assets acquired and liabilities assumed are determined based on each specific tax jurisdiction and related tax laws and regulations. See TX 10.3 for further discussion.
- Identify and measure temporary differences and acquired tax benefits. Identify the temporary differences related to the book bases and tax bases of the acquired identifiable assets and assumed liabilities. Determine whether the temporary differences are deductible temporary differences or taxable temporary differences, and recognize the appropriate deferred tax assets or deferred tax liabilities in accordance with ASC 805-740-25-2. Determine whether there are any acquired net operating losses (NOLs), credit carryforwards, or other relevant tax attributes that should be recorded as part of the business combination. See TX 10.4 for further discussion of the evaluation of deferred tax assets and acquired tax benefits in a business combination.
- Perform realization assessment for deferred tax assets recorded in acquisition accounting. Determine whether a valuation allowance is required to reduce deferred tax assets if they are not considered to be realizable. See TX 10.5 for further discussion of the evaluation of the realizability of deferred tax assets in a business combination.
- Consider the treatment of tax uncertainties and indemnifications. Identify and determine the accounting requirements for uncertain tax positions and indemnifications under ASC 805-740-25-2. See TX 10.7 for further discussion.
- Consider deferred taxes related to goodwill. Determine whether a deferred tax asset should be recognized for temporary differences associated with tax-deductible goodwill. See TX 10.8 for further discussion of recognizing deferred taxes related to goodwill.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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