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The recognized tax bases (the amount that is attributable for tax purposes) of the assets and liabilities are compared to the financial reporting values of the acquired assets and assumed liabilities (book bases) to determine the appropriate temporary differences.

10.3.1 Determining tax bases in a taxable transaction

In a taxable transaction (e.g., an asset acquisition or a stock acquisition treated as an asset acquisition), the acquirer records the tax bases of the assets acquired and liabilities assumed at their fair values based on the applicable tax law. The allocation methodology for determining tax bases is often similar to the requirements of ASC 805. Sometimes the acquisition price exceeds the fair value of identifiable assets acquired and liabilities assumed. The excess often is treated as goodwill for tax purposes and may be tax-deductible. However, there could be differences in the allocation methodology for tax and financial reporting purposes because the tax allocation follows the relevant tax law. For example, the US federal tax code requires a specific allocation method to determine the new tax bases in a taxable transaction. The allocation methodologies for book and tax purposes may differ when the aggregate fair value of the net assets acquired exceeds the consideration transferred, because bargain purchases may not be recognized for tax purposes in some jurisdictions.
Differences between assigned values for financial reporting and tax purposes should be analyzed. Regulatory bodies in various jurisdictions could question differences in the allocation of values for book and tax purposes. An inaccurate determination of fair value for tax purposes could impact the financial statements. For example, an improper tax valuation allocation between amortizable intangible assets and goodwill could result in inaccurate deferred taxes being recorded for those jurisdictions in which goodwill is not tax-deductible, and may also be an uncertain tax position requiring assessment for recognition and measurement. See TX 10.7 for more on acquisition accounting and uncertain tax positions.
The purchase price for financial reporting purposes may also differ from the purchase price for tax purposes. This may occur for several reasons, including the existence of contingent consideration (see TX 10.4.5) and the treatment of transaction costs (TX 10.4.7).

10.3.2 Determining tax bases in a nontaxable transaction

In a nontaxable transaction (e.g., stock acquisitions), the historical tax bases of the acquired assets and assumed liabilities, net operating losses, and other tax attributes of the acquiree carry over from the acquired company. No new tax goodwill is created. However, tax goodwill of the acquiree that arose in a previous acquisition may carry over and will need to be considered in determining temporary differences. See TX 10.8.2 for further information.

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