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April 2022

ASSET ACQUISITIONS AND DEFERRED TAXES

By Dolphy D’Souza
Chartered Accountant
Reading Time 5 mins
This article deals with a scenario concerning the creation of deferred taxes where the shares of a company are acquired, and the acquisition is classified as an asset acquisition.

BACKGROUND
•    A Ltd acquires 100% shares of B Ltd, having one Building (a PPE) and accumulated loss of INR 30 for a cash consideration of INR 100.

•    This transaction is not a business combination (i.e., the transaction is accounted for as an asset acquisition).

•    Tax rate applicable - 30%.

•    The carrying value and tax base of the Building in the standalone financial statement (SFS) of B Ltd is INR 80 and INR 70, respectively. The taxable temporary difference of INR 10 arose after the initial recognition of the Building by B Ltd, and accordingly, a deferred tax liability of INR 3 has been recognised.

•    B Ltd has accumulated a loss of INR 30, which it expects to be able to utilise and accordingly, a deferred tax asset of INR 9 has been recognised.

•    A Ltd also expects to be able to utilise all of the available losses of B Ltd, and it is probable that future taxable profit will be available against which the tax losses can be utilised.

•    The fair value of Building on the date of acquisition is INR 91.

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