Financial Reporting for Taxes
TEI May A&A Update Meeting
Acquisition accounting
May 8, 2012
Orlando, FL
Wendi Christensen— Deloitte Tax LLP
wendichristensen@deloitte.com
Agenda
Disclosures and
supporting work papers
Evaluate post-closing
adjustments
Consider costs of
the acquisition
Evaluate tax attributes
Analyze uncertain
tax positions
Record tax consequences
of fair value accounting
adjustments
Obtain an understanding
of the transaction
Step 7
Step 6
Step 5
Step 4
Step 3
Step 2
Step 1
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2
Financial Reporting for Taxes
Step 1: obtain an understanding
of the transaction
Tax status of enterprise being acquired
Taxable Enterprises
• Generally deferred taxes must be provided on the taxable and
deductible temporary differences that arise from a difference between
the tax basis of an asset or a liability and its reported amount in the
financial statements
Parent
company
Each company has an
inventory of taxable and
deductible temporary
differences that will result in
DTAs and DTLs
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Subsidiary
(or <50%
owned investee)
4
Tax status of enterprise being acquired (cont.)
Nontaxable Enterprises (e.g., Partnerships)
• No deferred taxes are recorded in the partnership’s financial statement
since tax consequences are borne by its partners
• If a partner is a taxable enterprise, deferred taxes are provided on
temporary differences associated with that partner's interest
C Corp
Deferred tax on temporary
difference associated with
the partnership investment
60%
No deferred tax recorded in
the partnership’s financial
statements
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Investor
40%
Ptrshp
5
Basic model — tax effects of basis differences
• Acquirer recognizes and measures each asset acquired and
each liability assumed and any non-controlling interest at its
acquisition date
fair value
• Record deferred taxes for estimated future tax effects attributable
to temporary differences and carryforwards
– A temporary difference exists when there is a taxable or deductible
difference between (1) the carrying amount of an asset or liability for
financial reporting purposes and (2) the tax basis of that asset or
liability (must consider the recognition and measurement
requirements for tax positions when determining the tax basis)
– The carrying amount for financial reporting purposes is the same,
regardless of the form of the business combination
– There is a difference in how the tax basis is determined depending on
whether the business combination is taxable or nontaxable
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Taxable business combinations
• Acquirer “steps up” the target’s historical tax bases in the assets
acquired and liabilities assumed to fair market value
• Includes asset acquisitions, stock acquisitions treated as asset
acquisitions by election (e.g., §338 elections) and integrated
transactions treated as asset acquisitions
Section 1060
allocation class
Description
Class I
Cash and near-cash
Class II
Actively traded property (e.g., publicly traded stock)
Class III
Mark-to-market assets
Class IV
Inventory
Class V
Assets not defined as any other class, including PP&E
Class VI
Sec. 197 intangibles, except goodwill and going concern
Class VII
Goodwill and going concern value
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Nontaxable business combinations
• Acquirer assumes the historical or “carry over” tax basis of
the acquired assets and liabilities assumed
• FMV accounting for book purposes will result in book/tax
basis differences (in addition to the historical differences)
• Includes stock acquisitions (absent a Section 338 election)
and tax-free asset and stock reorganizations
(e.g.,§368(a)(1)(A) and §368(a)(1)(B))
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Financial Reporting for Taxes
Step 2: record the tax
consequences of fair value
accounting adjustments
Example 1 — taxable asset purchase
Facts
• USP buys Target assets for $1,500
• USP recognizes and measures each asset acquired and
each liability assumed at its acquisition date fair value for
both tax and financial reporting purposes
• Since tax and financial reporting basis will be the same,
no temporary differences are expected
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Example 1 — taxable asset purchase (cont.)
Asset
PP&E
Intangibles
Goodwill
Total
PP&E
Intangibles
Goodwill
Equity
Book
basis
Tax
Basis
Difference
Tax rate
Deferred
asset
(liability)
$200
$200
—
40%
—
$1,000
$1,000
—
40%
—
$300
$300
—
40%
—
$1,500
$1,500
Debit
Credit
$200
$1,000
$300
$1,500
—
• No deferred taxes recorded —
no basis differences
• Temporary differences could
arise in the future if depreciation
and/or amortization rates for
book and tax are different
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Example 2 — nontaxable stock purchase
Facts
• USP issues its own shares to T shareholders in exchange
for their T shares
• For financial reporting purposes, USP recognizes and
measures each asset acquired and each liability assumed
at its acquisition date fair value
• For tax purposes, USP assumes the historical or “carry
over” tax basis of acquired assets and liabilities assumed
• The historical temporary differences will be adjusted on
account of the fair value accounting adjustments
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Example 2 — nontaxable stock purchase (cont.)
Def tax
asset
(liability)
Asset
Book
basis
Tax
basis
Difference
PP&E
$200
$150
$50
40%
($20)
Intangibles
$1,000
$0
$1,000
40%
($400)
Goodwill
$300(1)
$0
300
Total
$1,500
$150
$1,350
(1) Before
Debit
PP&E
Intangibles
Goodwill
DTL
Equity
Tax rate
NA
—
($420)
considering deferred taxes
Credit
$200
$1,000
$720
$420
$1,500
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Application to specific basis differences
• Goodwill
• In-process R&D
• Contingent liabilities
• Deferred revenue
• Contingent consideration
• Compensation expenses
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Goodwill
Book Goodwill
=
Consideration transferred +
FV of non-controlling interest
@ acquisition date
>
FV of identifiable net assets acquired
Tax Goodwill
=
Tax-deductible goodwill
Component 1 Goodwill =
Lesser of Book or Tax Goodwill
Any difference
between tax and =
book goodwill
Component 2 Goodwill
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Goodwill (cont.)
Tax Accounting for Component 2 Goodwill
• A deferred tax asset is recognized for the excess of tax deductible
goodwill over book goodwill
• ASC 740-10-25-3(d) prohibits recording a deferred tax liability for the
excess of the book over tax goodwill when difference is acquired
Issue and Potential Risk
• Historical books may have deferred tax liability or deferred tax asset
related to a basis difference in goodwill
• Any deferred taxes related to historical accounting for goodwill must be
removed and reset
– Component 1 goodwill has no temporary difference on acquisition date
– Component 2 goodwill may have a DTA for tax goodwill over book goodwill,
but no DTL can exist
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$80 DTL
included in
liabilities
acquired
Example 3 — goodwill
Goodwill “reset”, book basis > tax basis
Preliminary calculation:
Component 1 goodwill (pre-acquisition balance)
Component 2 goodwill (pre-acquisition balance)
Component 2 goodwill (generated by acquisition)
Total goodwill
Journal entry to reverse the existing DTL:
Deferred tax liability
Goodwill
*DTL = .40 x $200
Book
Tax
$400
$200
$600
$1,000
0
$200
DR
$80*
CR
$80
Book
Tax
$200
720
$920
$200
0
$200
Adjusted calculation:
Component 1 goodwill
Component 2 goodwill
Total goodwill
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In-process R&D
Financial Reporting
• Acquired IPR&D will be recognized as an indefinite-lived intangible
asset separately from goodwill and recorded at fair value as of the
acquisition date
• The asset will be amortized over the useful life when R&D is complete
or expense upon abandonment of project
– Although it is considered an indefinite lived asset, IPR&D will be expensed
over a relatively limited period of time
Tax Accounting
• The amount recorded for an IPR&D intangible asset must be compared
with its tax basis to determine whether a temporary difference exists
• In nontaxable transactions tax basis will typically be zero and a DTL will
be recorded for the basis difference
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Contingent liabilities
Financial Reporting
• The acquirer recognizes and measures each liability assumed
For Tax Purposes
• DTA recorded for liabilities deductible when paid or otherwise reduce
book income for taxable income calculation (e.g., Sch M adjustment)
• No DTA is recorded for liabilities that are not deductible when paid
(e.g., contingent liabilities assumed in an asset acquisition)
– Payment of these liabilities results in an increase in tax basis of acquired
assets
Issue and Potential Risk
• Accounting systems may not be able to separately track nondeductible
payments on liabilities resulting in double deductions: one deduction
upon payment and the second through amortization of acquired assets
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Deferred revenue
Financial Reporting
• Revenue related to contracts which extend beyond one reporting period
is deferred and taken into account over the life of the contract
• If deferred revenue represents a future performance obligation, record
that obligation at fair value
Tax Accounting
• Deferral of income is only permitted in certain circumstances
• In a nontaxable business combination, the acquirer should record a DTA
for the post purchase accounting balance of deferred revenue
• In a taxable business combination:
– Acquirer includes the actual cost to satisfy target’s deferred revenue contract
in the tax basis of the acquired assets during the period in which the costs are
incurred
– A DTA is recorded for the financial reporting profit margin that will never be
taxable
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Contingent consideration
Financial Reporting
• Record at fair value (regardless of likelihood of payment) and classify as
a liability or in equity
• Liability-classified earn-out arrangements will be re-measured to FV at
each balance sheet date; changes are recognized in post-acquisition
income statement
Tax Accounting
• In a nontaxable business combination, payment of contingency
generally results in additional purchase price for target stock
– Several exceptions to recording deferred taxes on outside basis differences in
the stock of a subsidiary
• In a taxable business combination, payment of contingency generally
results in additional amortizable or depreciable tax basis in target assets
– The amount at closing would be expected to eliminate any initial basis
differences in the target assets
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Accrued compensation
Financial Reporting
• Acquirer recognizes and measures accrued liabilities for
compensation and benefits
• Some of the compensation may have accrued as a result of
the business combination
Tax Accounting
• Record a DTA for compensation expenses that will be
deductible when paid
• Accrued compensation expenses may not be deductible
– Tax deductions may be limited under Section 280G
– Additional analysis may be required to identify the tax
deductible payments in each period
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Financial Reporting for Taxes
Step 3: analyze uncertain
tax positions
Uncertain tax positions — generally
Financial Reporting
• A tax position is first evaluated for recognition based upon
its technical merits. Tax positions that meet a recognition
criterion are then measured to determine an amount to
recognize in the financial statements. ASC 740-10-05-6
• Acquirer can only change the recognition and measurement
of target’s historic tax positions based upon new information
and not from a new evaluation or new interpretation by
management of information that was available in a previous
financial reporting period. ASC 740-10-35 and 10-40
Note: In order to make changes in recognition (e.g., new court
case) or measurement (e.g., different settlement profile),
identification of new information is required
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Uncertain tax positions — acquired entities
Changes in an acquired entity’s uncertain tax positions:
• After the acquisition date, all adjustments to an acquired entity’s
uncertain tax positions are recorded in income tax expense, with one
exception:
– If the company is still finalizing its accounting during the measurement period,
and an adjustment is required that is based on new information about facts
and circumstances that existed as of the acquisition date, then the adjustment
is recorded to goodwill
• It is important to:
– Finalize tax due diligence before measurement period ends
– Refine UTB analysis before measurement period ends
– Document all information available and considered at the acquisition date
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Financial Reporting for Taxes
Step 4: evaluate tax attributes
Valuation allowances
Acquirer
• Acquirer’s removal (or reversal) of its valuation allowance or any
adjustment to tax-related balances as a result of a business
combination is recorded as a component of income tax expense and not
included as part of acquisition accounting
Target
• Adjustments to the target’s historical valuation allowance for DTAs at
the date of acquisition (to reflect the fact that the acquirer and target
will be filing a consolidated tax return) are reflected as adjustments
to goodwill
• See discussion of measurement period for subsequent changes
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Valuation allowances — section 382 limitations
• Section 382 generally places a limitation on the amount of net operating losses
and other tax attributes arising before a change in ownership that may be used
to offset taxable income after such a change
• A business combination is an ownership change that typically results in a
Section 382 limitation
Considerations:
1. What amount of DTA should be recorded for tax attributes subject to
limitation?
• A DTA should be recorded for the maximum amount of net operating loss that is
mathematically possible of being used (sum of annual limits and NUBIG)
2. How does the limitation affect the valuation allowance and uncertain tax
benefits considerations?
• A valuation allowance should be used to reduce the above DTA to the amount of tax
benefits from the net operating loss that is more likely than not to be realized
• The presentation of the DTA/UTPs may be affected by whether the acquiring
company records UTPs using the net or gross method
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Indemnification by seller
Financial Reporting
• Acquirer recognizes an indemnification asset (subject to
realizability) at the same time and on the same basis as the
indemnified item
Tax Accounting
• The indemnification receivable is usually not a temporary
difference because it is considered an adjustment to
purchase price and as such is not taxable
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Example 4 — indemnification and UTB
Facts
• Acquirer purchases Target
• Target has an UTB liability (indemnified by a previous owner) of $100 related to
a federal tax issue (not MLTN to be realized)
• Under the purchase agreement, Target’s prior owner indemnifies Acquirer
against losses related to the UTB
Day 1 accounting
Indemnification receivable
DR
CR
$100
UTB liability
$100
Settlement for $75
Indemnification expense
$25
Indemnification receivable
UTB liability
$25
$100
Tax expense
$25
Cash
$75
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Changes to jurisdictional footprint
• Acquirer’s historical state tax “footprint” can be changed by the transaction
– Assume an acquirer operating in Nevada with no deferred state taxes but
substantial temporary differences acquires a target company in California
– Acquirer now required to file a combined California return with target
company
– Acquirer must record deferred taxes for California state tax (on its own
historical temporary differences) even though no state taxes were
previously recognized
• Any change in the measurement of existing deferred tax items of the
acquirer as a result of the acquisition are recorded “outside” of the business
combination accounting as a component of income tax expense
• Measurement of target’s deferred taxes must consider the expected state
combined and consolidated filings and the period when the combined
filings will commence
• Adjustments to target’s historical deferred taxes are accounted for as part
of the business combination
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Financial Reporting for Taxes
Step 5: evaluate costs of
the acquisition
Transaction costs
Financial Reporting
• Under ASC 805, transaction costs are expensed as
incurred
Tax Treatment
• Costs are either:
– Capitalized into asset or stock basis or
– Capitalized as a separate non-amortizable asset (for tax-free
acquisitions)
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Transaction costs — pre-acquisition period
View 1 — Don’t Anticipate Closing
• Pre-closing reporting period — record tax consequences assuming
transaction won’t close (e.g., assume costs not yet deducted will
eventually become deductible)
• Actual tax consequences are determined and recorded at closing
View 2 — Record Expected Tax Consequences
• Pre-closing reporting period — if transaction is more-likely-than-not
(MLTN) to close, record expected tax consequences of transaction
costs according to the MLTN form of the transaction (e.g., taxable or
nontaxable business combination). If transaction is not MLTN to close,
then record tax consequences assuming transaction won’t close (see
View 1 above).
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Example 5 — transaction costs
Facts
• During Q3 2010, Acquirer begins due diligence for acquisition of Target
stock
• Acquisition is expected to be structured as a non-taxable business
combination and expected to close in Q1 2011
• For financial reporting purposes, Acquirer expenses $10,000 of
transaction costs during Q3 and Q4 of 2010
• A preliminary tax analysis of costs determines the following:
– Non-deductible costs = $6,000 (added to tax basis of Target stock)
– Deductible costs = $4,000 (deductible upon closing of the transaction)
• Tax rate is 40%
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Example 5 — transaction costs (cont.)
View 1 — Don’t Anticipate Closing
DR
Transaction expense
DR
$10,000
Cash
$10,000
Deferred tax asset
$4,000
Deferred tax expense
$4,000
Adjusting entry at closing
Deferred tax expense
$4,000
Deferred tax asset
$4,000
Current tax liability
$1,600
Current tax expense
Net 2,400
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$1,600
36
Example 5 — transaction costs (cont.)
View 2 — Record Expected Tax Consequences
DR
Transaction expense
CR
$10,000
Cash
$10,000
Deferred tax asset
$1,600
Deferred tax expense
$1,600
At close
Deferred tax expense
$1,600
Deferred tax asset
Current tax liability
$1,600
$1,600
Current tax benefit
Net zero
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$1,600
37
Example 6 — transaction costs
Facts
• During Q1 2010, Acquirer announces its intent to acquire Target and
expects to close in Q3 2010 (expected to be structured as a non-taxable
transaction)
• In Q2, Acquirer determines that due to market conditions it does not
expect to close the transaction
• In Q3, Acquirer acquires Target
• For financial reporting purposes, Acquirer estimates it will incur $10,000
of transaction costs in 2010
• A preliminary tax analysis of costs determines the following:
– Non-deductible costs = $6,000
– Deductible costs = $4,000 (deductible upon closing of the transaction)
• Assume 40% tax rate
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Example 6 — transaction costs (cont.)
View 1
Pre-tax income
Q1
Q2
Q3
Actual
$100,000
$100,000
$100,000
$100,000
6,000
6,000
Nondeductible transaction costs
Net tax to be provided
Estimated effect on AETR(1)
View 2
Pre-tax income
Nondeductible transaction costs
40,000
40,000
42,400
42,400
40%
40%
42.4%
42.4%
Q1
Q2
Q3
Actual
$100,000
$100,000
$100,000
$100,000
6,000
6,000
6,000
Net tax to be provided
42,400
40,000
42,400
42,400
Estimated effect on AETR(1)
42.4%
40%
42.4%
42.4%
(1) Assuming
the transaction costs are not considered significant, unusual, or extraordinary…ASC 740-270-30-8
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Financial Reporting for Taxes
Step 6: evaluate post-closing
adjustments
Measurement period revisited
• Measurement period is the period after the acquisition date during
which the acquirer may adjust the provisional amounts recognized for a
business combination to reflect new information obtained about facts
and circumstances that existed as of the acquisition date
• Measurement period ends as soon as the acquirer receives the
information it was seeking or learns that more information is not
obtainable (should not exceed one year from the acquisition date)
• Acquirer revises comparative information for prior periods presented in
financial statements as needed
• After the measurement period ends, the acquirer revises the accounting
for a business combination only to correct an error
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Example 7 — measurement period adjustments
Acquisition Closes
1/1/09
Facts
Measurement Period Closes
3/31/09
6/30/09
10Q includes
tax estimates
Tax acquisition
accounting
finalized
9/30/09
1/1/10
• On January 1, 2009, Company X acquired 100% of Target
• Company X collects jurisdictional tax rate information and analyzes Target’s deferred tax
assets and liabilities
• Company X closes FY 2009 Q1 with estimates for taxes and discloses in its business
combination footnote that data is still being gathered to finalize the tax accounting
• In June 2009, Company X gathers all information needed to finalize tax adjustments
associated with the transaction (for facts that existed as of the acquisition date) and
records the entries in its June close
• In July 2009, Company X files its Form 10Q and discloses the tax accounting has been
finalized for the acquisition of Target
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Example 7 — measurement period adjustments
(cont.)
Acquisition Closes
1/1/09
(1) Additional Facts
Measurement Period Closes
3/31/09
6/30/09
10Q includes
tax estimates
Tax acquisition
accounting
finalized
9/30/09
1/1/10
• In June 2009, in connection with finalizing tax accounting related to the
acquisition, Company X management identifies new information
• New information (which existed at acquisition date) makes a portion of the
acquired entity's deferred tax assets not MLTN of being realized
• Company X’s management concludes an adjustment is needed to increase the
valuation allowance
What journal entry is necessary?
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Example 7 — measurement period adjustments
(cont.)
Acquisition Closes
1/1/09
(2) Additional Facts
Measurement Period Closes
3/31/09
6/30/09
10Q includes
tax estimates
Tax acquisition
accounting
finalized
9/30/09
1/1/10
• In September 2009, management reevaluates acquired entity’s DTA valuation
allowance to consider new facts (dramatic downturn in business)
• Management concludes an increase in the acquired entity’s valuation allowance
is needed since DTAs are not MLTN of being realized
What journal entry is necessary?
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Example 7 — measurement period adjustments
(cont.)
Acquisition Closes
1/1/09
Measurement Period Closes
3/31/09
6/30/09
10Q includes
tax estimates
Tax acquisition
accounting
finalized
(3) Additional Facts
9/30/09
1/1/10
4/30/10
• In April 2010, management discovers errors in the tax basis used to measure deferred
taxes in acquisition accounting
How should the adjustment be recorded?
• Error are corrected by adjusting misstated accounts (i.e., deferred taxes and goodwill)
• If the correcting entry was recorded to income tax expense, tax expense would be either
over or understated and goodwill will remain recorded at an incorrect amount
• Entry to deferred taxes and goodwill may be recorded in the year the error is discovered
(if amounts are material, restatement of prior periods may be necessary)
• Adjustment most likely will be go to goodwill even when goodwill has been impaired
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Example 8 — contingent consideration
Facts (Stock Acquisition)
• Acquirer purchases Target stock for $200 plus a contingent payment
with a fair value of $50
• Fair value of the identifiable assets is $200 and the tax basis is $25
• Tax rate is 40%
Day 1 accounting
DR
Assets
$ 200
Goodwill
$ 120
CR
Cash
$ 200
Contingent consideration liability
$ 50
Deferred tax liability ($200-$25 × 40%)
$ 70
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Example 8 — contingent consideration (cont.)
Scenario 1 — settle at the initial amount accrued:
DR
Contingent consideration liability
50
Cash
CR
50
Scenario 2 — settle at $50 greater than initial amount accrued:
Pre-tax expense
50
Contingent consideration liability
50
Cash
100
• In non-taxable business combinations, settlement of contingent consideration
classified as a liability for an amount greater than the initial amount is recorded
as an expense for book purposes and an increase in stock for tax purposes
• An unfavorable permanent difference is created since ASC 740-30-25-9
prohibits recognition of a DTA when tax basis exceeds book basis in the stock
when the temporary difference will not be reversed in the foreseeable future
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Example 8 — contingent consideration (cont.)
Scenario 3 — settle at $40 less than initial amount:
Contingent consideration liability
DR
CR
$ 50
Income
$ 40
Cash
$ 10
• Settlement for an amount less than the initial amount is recorded as income for
book purposes and as a decrease in the stock for tax purposes
• A favorable permanent difference may arise if (1) target is a domestic
corporation; (2) stock basis difference can be eliminated in a tax-free manner
(e.g., liquidation) and (3) Acquirer intends to realize stock basis difference [ASC
740-30-25-7 exception to DTL applicable to domestic sub]
• Other exceptions might apply to a foreign target company
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Example 9 — contingent consideration
Facts (Taxable Business Combination)
• Acquirer purchases Target’s assets for $200 plus a contingent payment with a
fair value of $50
• Tax rate is 40%
Day 1 accounting
DR
Assets
$ 200
Goodwill
$ 50
CR
Cash
$ 200
Contingent consideration liability
$ 50
• At acquisition date, no temporary differences considered to exist in Target’s
assets since payment of the contingent consideration (“expected”) results in
additional amortizable/depreciable tax basis in goodwill
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Example 9 — contingent consideration (cont.)
Scenario 1 — settle at the initial amount accrued:
Contingent consideration liability
Cash
DR
CR
$ 50
$ 50
Scenario 2 — settle at $50 greater than initial amount accrued:
Expense
Contingent consideration liability
$ 50
$ 50
Cash
$ 100
Deferred tax asset
$ 20
Deferred tax provision
$ 20
• In a taxable business combination, settlement of contingent consideration
classified as a liability for an amount greater than the initial amount is recorded
as an expense for book purposes and an increase in asset basis for tax
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Contingent consideration — taxable business
combination
Scenario 3 — settle at $40 less than initial amount:
Contingent consideration liability
DR
CR
$ 50
Income
$ 40
Cash
$ 10
Deferred tax provision
$ 16
Deferred tax liability
$ 16
• In a taxable business combination, settlement of contingent consideration
classified as a liability for an amount less than the initial amount is recorded as
income for book purposes and as decreased asset basis for tax purposes
• A deferred tax liability is recorded on the temporary difference resulting from the
immediate deduction of “expected” tax basis
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Financial Reporting for Taxes
Step 7: disclosures and
supporting documentation
Disclosure requirements
• Under ASC 805-10-50-1, the acquirer shall disclose information that
enables users of its financial statements to evaluate the nature and
financial effect of a business combination that occurs either:
– During the current reporting period; or
– After the reporting date but before the financial statements are issued
• Paragraphs 2 through 8 detail specific disclosure requirements with
respect to the initial accounting for a business combination
• Under ASC 805-10-50-6, if the initial accounting is incomplete, an
acquirer shall disclose:
– The reasons why the initial accounting is incomplete
– The assets, liabilities, equity interests, or items of consideration for which the
initial accounting is incomplete
– The nature and amount of any measurement period adjustments recognized
during the reporting period
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53
Sample UTB tabular rollforward
(Dollar amounts in millions)
2011
2010
2009
Balance at January 1
$114
$66
$52
Additions for tax positions of prior years
11
12
1
Reductions for tax positions of prior years
-1
-2
-11
Additions based on tax positions related to current year
63
42
24
Lapse of statute of limitations
—
—
—
Settlements
-16
-7
—
Foreign exchange translation
-3
3
—
117
—
—
$285
$114
$66
Positions assumed in ABC transaction
Balance at December 31
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54
Sample business combination footnote
• The purchase accounting adjustments are preliminary and subject to
revision. At this time, except for the items noted below, the Company
does not expect material changes to the value of the assets acquired or
liabilities assumed in conjunction with the transaction. Specifically, the
following assets and liabilities are subject to change:
– Intangible management contracts were valued using preliminary December 1,
2009 AUM and assumptions. The value of such contracts may change,
primarily as the result of updates to AUM and those assumptions;
– As management receives additional information, deferred income tax assets
and liabilities and other assets, due from and to related parties, and other
liabilities may be adjusted as the result of changes in purchase accounting
and applicable tax rates
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55
Supporting process and documentation
• Internal controls
– Frequent and formal interaction between accounting and tax departments
– Process and controls for tax effecting fair value adjustments — consider
technology used, resources involved, review procedures, etc.
– Analytical review of acquisition accounting (for instance, ETR on goodwill
adjustments)
– Education of tax department personnel
– Integration with tax provision calculations
– Other tools — work plans, process memos, etc.
• Technical analysis
– Obtain and review financial accounting documentation, which will often
include technical memoranda
– Memorialize tax analysis of acquisition accounting issues and conclusions on
tax provision and tax return treatment
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56
Supporting process and documentation (cont.)
• Data considerations
– Particularly in a nontaxable acquisition, fair value accounting may
result in the loss of historic data that will still be required for tax
purposes — e.g., historic debt discounts
– Identify such data needs during acquisition accounting and implement
plans to maintain necessary data
• External audit
– Consider auditability of the acquisition accounting work product
– Develop work papers for external auditor review (opening balance
sheet, tax effect of fair value adjustments, tax attribute analysis and
adjustments, technical memos, process documentation)
Copyright © 2012 Deloitte Development LLC. All rights reserved.
57
Copyright © 2012 Deloitte Development LLC. All rights reserved.
58
Keep in mind
This presentation contains general information only and is
based on the experiences and research of Deloitte
practitioners. Deloitte is not, by means of this presentation,
rendering business, financial, investment, or other
professional advice or services. This presentation is not a
substitute for such professional advice or services, nor
should it be used as a basis for any decision or action that
may affect your business. Before making any decision or
taking any action that may affect your business, you should
consult a qualified professional advisor. Deloitte, its affiliates,
and related entities shall not be responsible for any loss
sustained by any person who relies on this presentation.
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59
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its
network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about
for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see
www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain
services may not be available to attest clients under the rules and regulations of public accounting.
Copyright © 2012 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited