Business combinations and deferred tax

In this lesson

1. 0:00 Business combinations and deferred tax
2. 0:40 Undistributed profits and investment recognition
3. 1:40 Fair value adjustments worked example
4. 3:25 Unrealised profits in consolidation
5. 4:41 Calculating deferred tax on inventory

About this lesson

You'll explore two key scenarios: fair value adjustments on acquisition (which create deferred tax liabilities that increase goodwill) and unrealised profits from intra-group trading (which create deferred tax assets). This is essential for SBR and AFM papers, where consolidation adjustments frequently appear in exam questions. By working through practical examples, you'll understand why temporary differences emerge between carrying amounts and tax bases, and how to calculate and record the resulting deferred tax positions correctly. The first part covers fair value adjustments when one company acquires another. When identifiable assets and liabilities are revalued to fair value on consolidation, no corresponding adjustment is made for tax purposes. This creates a temporary difference and a deferred tax liability, which reduces the net assets acquired and increases goodwill. You'll also see why deferred tax on investments in subsidiaries isn't recognised when the parent controls the dividend policy and profits won't be distributed in the foreseeable future. A worked example shows how a machine fair-valued upwards generates a deferred tax liability that flows through your consolidation calculations. The second part focuses on unrealised profits from inter-company sales. When inventory is sold between group companies but remains unsold at year end, the profit must be eliminated on consolidation. This adjustment reduces the carrying amount of inventory but doesn't affect the tax base, creating a deductible temporary difference and a deferred tax asset. The key principle here is matching: you remove the tax expense relating to profits you've removed from the financial statements. A second worked example demonstrates how to calculate both the unrealised profit adjustment and the associated deferred tax asset.

Duration: 6m