Trueblood Case 13-11: Income Taxes – LOL
Case Facts: * Transaction Date: June 30, 2011 * Acquirer: LOL * Acquired: Sundance * LOL Tax Related Balances as of December 31, 2010 * $150mm Deferred Tax Asset * $105mm Valuation Allowance * Sundance Tax Related Balances as of Acquisition Date * $200mm Deferred Tax Asset * $200mm Valuation Allowance * Acquisition Date Decisions * Remove LOL Valuation Allowance of $105mm * Remove $150mm Valuation Allowance from Sundance books * Subsequent Information as of December 31, 2012 * Sundanced Valuation Allowance is unnecessary ($50mm)
Guidance Summary: * Both IAS 12 and ASC 740 “require income taxes to be…show more content… |
Question 1 of 3 (GAAP): Does the release of the $105 million LOL valuation allowance benefit the tax provision or is the adjustment considered an adjustment to acquired goodwill when applying the acquisition method of accounting? * In some business combinations, the acquirer has cumulative losses that caused the acquirer to conclude that a valuation allowance was required on its deferred tax assets (including net operating losses) immediately prior to the acquisition, and the deferred tax liabilities assumed in the business combination are available to offset the reversal of the acquirer’s pre-existing deferred tax assets. * As a result of the business combination, the acquiring company determines their pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and the valuation allowance should be reduced or eliminated. * Under ASC 805-740, a change in an acquirer’s valuation allowance for a deferred tax asset that results from a change in the acquirer’s circumstances caused by a business combination… * should be accounted for as an event separate from the business combination. * Conclusion: Changes in an acquirer’s valuation allowances that stem from a business combination should be recognized as an element of the acquirer’s deferred income tax expense (benefit) in the reporting period that includes the business combination.
Question 2 of 3 (GAAP): In adjusting the