How do you account for the deferred tax on a fair-value uplift to PP&E in a business combination, and how does it affect goodwill and the group's effective tax rate over time?
An advanced Group Accounting question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
A fair-value uplift on acquired PP&E raises its carrying amount above its tax base, creating a taxable temporary difference — so you recognize a deferred tax LIABILITY (not an asset), measured under IAS 12 at the tax rate of the jurisdiction where the asset sits and the difference will reverse. At acquisition the DTL is part of the PPA: it reduces the identifiable net assets acquired and therefore increases goodwill. Over time, the uplift is depreciated, so the extra book depreciation (which is generally not tax-deductible) increases the group's pre-tax expense while the DTL unwinds, releasing a deferred-tax credit through tax expense — the two broadly offset, but the mechanics move the effective tax rate period to period and reduce reported post-tax profit via the extra depreciation. The common error is calling this a DTA: an asset uplift produces a DTL; a DTA would arise from a downward adjustment, losses, or deductible differences.
WHAT INTERVIEWERS LISTEN FOR
- ✓PP&E uplift: carrying > tax base → taxable difference → deferred tax LIABILITY
- ✓Measure per IAS 12 at the asset's jurisdiction rate
- ✓DTL is part of PPA: increases goodwill at acquisition
- ✓Unwinds as the uplift depreciates; affects ETR; extra (non-deductible) depreciation lowers post-tax profit
COMMON MISTAKES
- ✗Treating an asset uplift as creating a DTA
- ✗Ignoring the goodwill impact at acquisition
- ✗Forgetting the DTL unwinds as the asset depreciates
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