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Hello Mike, here is my question:
i have recently gone through a business combination exercise.
Among other things there was one subsidiary in which we had to consider two fair value adjustments (PPE and an intangible asset) and also a contingent liability. Also, In this note it was mentioned that FV adjustments were subject to deferred tax.
The paragraph for the contingent liability is following:
“On 1 July 2013, Gamma had a contingent liability which it did not recognise in its own financial statements. This contingent liability still existed, and was still unrecognised by Gamma, at 31 March 2014. As at 1 July 2013, the directors of Alpha believed that the contingent liability had a fair value of $16 million. On 31 March 2014, they reassessed its fair value at $12 million. The reassessment was due to a change in circumstances after 1 July 2013.”
Going through the answer i noticed that:
– deferred tax movement was recognized for PPE and the intangible asset (due to depreciation of course, as depreciation decreased the carrying amount of these two assets – i agree with this treatment)
– no deferred tax movement was recognized for the contingent liability although the fair value changed from 16 to 12 million. only this difference of 4 million was recognized in consolidated Statement of Profit & Loss. not any deferred tax.
Why is that ? why deferred tax is recognized in PPE and the intangible asset and not recognized in this contingent liability ?
I would appreciate very much your opinion.
Kind RegardsKali mera Dimitrios
This is a bit difficult not having the question in front of me.
Tell me, was there any deferred tax implication taken into account on the contingent liability as at date of acquisition?
P2D2 will probably have to ask the same question – I notice that you have posted the same question to him
May I respectfully ask that you don’t multiple post your questions in future?
Hi Mike, glad that you know this very basic Greek phrase ! My apologies for the first post, i thought it was probable that you wont see it so i posted it here. Again, my apologies.
Actually this is the consolidation question from Diploma IFRS June 2014 exam paper. here is the link (page 4, Note 2):
and the answer :
no deferred tax on working 8 only recognition of the contingent liability movement of 4 million in working 4
this is a consolidated Profit & Loss exercise. i have similar issue with the Diploma IFR December 2016 exam, here it is consolidated Statement of Financial Position and i do not know whether to account for for deferred tax arising from the contingent liability
The only reason that I can think of is that the contingent liability has a probability of occurrence of less than 50% (by definition) and that the deferred tax implications are therefore too remote to be taken into account
However, the contingent liability itself is taken into account upon the event of the acquisition and therefore any post-acquisition movement in that contingent liability value must also be taken into account
OK?
Yes Mike. i am fine with this. thank you very much and have a nice day.
I wish you Merry Christmas and a Happy 2017!
In IFRS diploma Dec 2016, The fair value movement of contingent liabilities had been considered in calculating deferred tax. I got confused between Dec 2016 exam and June 2014 exam in IFRS diploma
It seems that Dimitrios in December last year had the same issues but I notice that you use the past tense “I got confused between Dec 2016 exam and June 2014 exam …” so do I assume that you are now sorted out with this issue?
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