Trueblood Case 13-11: Income Taxes – LOL
* Transaction Date: June 30, 2011
* Acquirer: LOL
* Acquired: Sundance
* LOL Tax Related Balances as of December 31, 2010
* $150mm Deferred Tax Asset
* $105mm Valuation Allowance
* Sundance Tax Related Balances as of Acquisition Date
* $200mm Deferred Tax Asset
* $200mm Valuation Allowance
* Acquisition Date Decisions
* Remove LOL Valuation Allowance of $105mm
* Remove $150mm Valuation Allowance from Sundance books
* Subsequent Information as of December 31, 2012
* Sundanced Valuation Allowance is unnecessary ($50mm)
* Both IAS 12 ...view middle of the document...
” | An entity records a deferred tax asset if it is probable (i.e., greater than 50% likely) that the asset will be realized. |
Question 1 of 3 (GAAP): Does the release of the $105 million LOL valuation allowance benefit the tax provision or is the adjustment considered an adjustment to acquired goodwill when applying the acquisition method of accounting?
* In some business combinations, the acquirer has cumulative losses that caused the acquirer to conclude that a valuation allowance was required on its deferred tax assets (including net operating losses) immediately prior to the acquisition, and the deferred tax liabilities assumed in the business combination are available to offset the reversal of the acquirer’s pre-existing deferred tax assets.
* As a result of the business combination, the acquiring company determines their pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and the valuation allowance should be reduced or eliminated.
* Under ASC 805-740, a change in an acquirer’s valuation allowance for a deferred tax asset that results from a change in the acquirer’s circumstances caused by a business combination…
* should be accounted for as an event separate from the business combination.
* Conclusion: Changes in an acquirer’s valuation allowances that stem from a business combination should be recognized as an element of the acquirer’s deferred income tax expense (benefit) in the reporting period that includes the business combination.
Question 2 of 3 (GAAP): In adjusting the historical general ledger of Sundance (the acquired entity) in acquisition accounting, an entry will be made to debit the valuation allowance. Does the credit entry that corresponds to that debit belong to the LOL tax provision as an income tax benefit or is the entry simply reflected as a credit entry to goodwill as part of the accounting for the acquisition of Sundance?
* Assuming the company has adopted statement 141 (codified ASC 805), the offset to the debit to the valuation allowance will be to Goodwill (assuming a positive balance).
Question 3 of 3 (GAAP): Does the release of the $50 million valuation allowance on the Sundance DTA on December 31, 2012 (resulting from new information after the date of acquisition), benefit the tax provision or is the adjustment considered an adjustment to acquired goodwill when applying the acquisition method of accounting?
* Changes within the measurement period that result from new information about facts and circumstances that existed at the acquisition date shall be recognized through a corresponding adjustment to goodwill.
* All other adjustments shall be reported as a reduction or increase to income tax expense.
* Conclusion: Because this is new information subsequent to acquisition the adjustment would be reflected in income tax expense.
Question 1 of 3 (IFRS): Does the release of...