Deferred Tax arising on Fair value adjustment

Hi Stephen,

I would like to ask the following question regarding the recognition of deferred tax arising on fair value adjustment of acquisition.

I understand in the fiscal year where the parent acquired the subsidary, the goodwill = Cost of investment – Fair value of the identifiable net assets would be recorded. In this regard, if the fair value of the identifiable net assets is more than the carrying amount of net assets at acquisition date, there would exist the fair value adjustment. Fair value adjustment would increase the fair value of identifiable net assets and decrease the goodwill.

Deferred tax in this cases is the idea that the parent would sell the subsidiary in the future, which would give rise to the potential gain on disposal and accordingly the potential tax liability. The tax liability would make the value of fair value adjustment decrease and increase the goodwill. In this case, at the year end of acquisition, the group’s consolidated FS would include the following entries: Debit Goodwill/Credit Deferred Tax Liabilities. Could you please confirm if my understanding is correct?

Another question I would like to ask if the subsequent years from the year of consolidation, if there is the gain in fair value of identifiable net assets, will the goodwill be recorded in the consolidated FS to be increased to reflect such gain (As I understand that this would happen as goodwill just be impaired not be increased).

Thank you very much for your kind answers.