{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/740/805/#55-implementation-guidance-and-illustrations","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"740","topic_title":"Income Taxes","subtopic":"740-805","subtopic_title":"Business Combinations","section":{"number":"55","label":"55 Implementation Guidance and Illustrations","anchor":"55-implementation-guidance-and-illustrations","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"740-805-55-1","para":"55-1","html":"
This Section is an integral part of the requirements of this Subtopic. This Section provides illustrations that address the application of accounting requirements to specific aspects of accounting for income taxes in connection with business combinations. The illustrations that follow make various assumptions about the tax law. These assumptions about the tax law are for illustrative purposes only.
","snippet":"This Section is an integral part of the requirements of this Subtopic. This Section provides illustrations that address the application of accounting requirements to specific aspects of accounting for income taxes in con…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:47416f997d47717cd45533bc3dd02fced7b372f9a88c05f2b78a23bce1b42c64","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}}],"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:5aaa3c550cf55b390d44594b46b713b7744542941cd769198b1587754b90922a","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"block":null,"heading":"Illustrations","paragraphs":[{"citation":"740-805-55-2","para":"55-2","html":"
This Example illustrates the guidance in paragraphs
805-740-25-2 through 25-3
and 805-740-30-1 relating to the recognition and measurement of a deferred tax liability and deferred tax asset in a nontaxable business combination. The assumptions are as follows:
  1. a
    The enacted tax rate is 40 percent for all future years, and amortization of goodwill is not deductible for tax purposes.
  2. b
    A wholly owned entity is acquired for $20,000, and the entity has no leveraged leases.
  3. c
    The tax basis of the net assets acquired (other than goodwill) is $5,000, and the recognized value is $12,000. Future recovery of the assets and settlement of the liabilities at their assigned values will result in $20,000 of taxable amounts and $13,000 of deductible amounts that can be offset against each other. Therefore, no valuation allowance is necessary.
","snippet":"This Example illustrates the guidance in paragraphs 805-740-25-2 through 25-3 and 805-740-30-1 relating to the recognition and measurement of a deferred tax liability and deferred tax asset in a nontaxable business combi…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:33e32b5054564bde3954efda33f1940d19b9d7095b7b876b5b75477505a46085","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-3","para":"55-3","html":"
The amounts recorded to account for the business combination transaction are as follows.
","snippet":"The amounts recorded to account for the business combination transaction are as follows.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:06b12254a287f77afdd40f8c2a4cff06b40990233756bf306bd7c5f36d23481a","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-4","para":"55-4","html":"
This Example illustrates the guidance in paragraphs 805-740-25-3 and 805-740-45-2 relating to the recognition of a deferred tax asset and the related valuation allowance for acquired deductible temporary differences at the date of a nontaxable business combination and in subsequent periods when the tax law limits the use of an acquired entity's deductible temporary differences and carryforwards to subsequent taxable income of the acquired entity in a consolidated tax return. The assumptions are as follows:
  1. a
    The enacted tax rate is 40 percent for all future years.
  2. b
    The purchase price is $20,000, and the assigned value of the net assets acquired is also $20,000.
  3. c
    The tax basis of the net assets acquired is $60,000. The $40,000 ($60,000 - $20,000) of deductible temporary differences at the combination date is primarily attributable to an allowance for loan losses. Provisions in the tax law limit the use of those future tax deductions to subsequent taxable income of the acquired entity.
  4. d
    The acquired entity's actual pretax results for the two preceding years and the expected results for the year of the business combination are as follows.
    • Year 1 \" $(15,000)\" Year 2 \" (10,000)\" Year 3 to the combination date \" (5,000)\" Expected results for the remainder of Year 3 \" (5,000)\"\t
  5. e
    Based on assessments of all evidence available at the date of the business combination in Year 3 and at the end of Year 3, management concludes that a valuation allowance is needed at both dates for the entire amount of the deferred tax asset related to the acquired deductible temporary differences.
","snippet":"This Example illustrates the guidance in paragraphs 805-740-25-3 and 805-740-45-2 relating to the recognition of a deferred tax asset and the related valuation allowance for acquired deductible temporary differences at t…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:e6d637864a90311365630268ec2cd10ea313eb2a3fe7290e94306b101ee2aef8","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-5","para":"55-5","html":"
The acquired entity's pretax financial income and taxable income for Year 3 (after the business combination) and Year 4 are as follows.
","snippet":"The acquired entity's pretax financial income and taxable income for Year 3 (after the business combination) and Year 4 are as follows.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:416d449638c7de2c2d5c161ce0ca5ff7475b11a7cb754f88800800dc5c1cc6ef","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-6","para":"55-6","html":"
At the end of Year 4, the remaining balance of acquired deductible temporary differences is $15,000 ($40,000 − $25,000). The deferred tax asset is $6,000 ($15,000 at 40 percent). Based on an assessment of all available evidence at the end of Year 4, management concludes that no valuation allowance is needed for that $6,000 deferred tax asset. Elimination of the $6,000 valuation allowance results in a $6,000 deferred tax benefit that is reported as a reduction of deferred income tax expense because the reversal of the valuation allowance occurred after the measurement period (see paragraph 805-740-45-2). Tax benefits realized in Years 3 and 4 attributable to reversals of acquired deductible temporary differences are reported as a zero current income tax expense. The consolidated statement of earnings would include the following amounts attributable to the acquired entity for Year 3 (after the business combination) and Year 4.
","snippet":"At the end of Year 4, the remaining balance of acquired deductible temporary differences is $15,000 ($40,000 − $25,000). The deferred tax asset is $6,000 ($15,000 at 40 percent). Based on an assessment of all available e…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:62906393b38a9bccc4faea33235fe703c1fd4b1005b8e57bc05326e7cd233e4e","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-7","para":"55-7","html":"
This Example illustrates the guidance in paragraph 805-740-25-3 if there is an elimination of the need for a valuation allowance for the deferred tax asset for an acquired loss carryforward based on offset against taxable temporary differences of the acquiring entity in a nontaxable business combination. This Example assumes that the tax law permits use of an acquired entity's deductible temporary differences and carryforwards to reduce taxable income or taxes payable attributable to the acquiring entity in a consolidated tax return. The other assumptions are as follows:
  1. a
    The enacted tax rate is 40 percent for all future years.
  2. b
    The purchase price is $20,000. The tax basis of the identified net assets acquired is $5,000, and the assigned value is $12,000, that is, there are $7,000 of taxable temporary differences. The acquired entity also has a $16,000 operating loss carryforward, which, under the tax law, may be used by the acquiring entity in the consolidated tax return.
  3. c
    The acquiring entity has temporary differences that will result in $30,000 of net taxable amounts in future years.
  4. d
    All temporary differences of the acquired and acquiring entities will result in taxable amounts before the end of the acquired entity's loss carryforward period.
","snippet":"This Example illustrates the guidance in paragraph 805-740-25-3 if there is an elimination of the need for a valuation allowance for the deferred tax asset for an acquired loss carryforward based on offset against taxabl…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:f8b11ea51edd6364fe098d9b155138f59443bc722a5d6c276c28062584b5ef5f","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-8","para":"55-8","html":"
In assessing the need for a valuation allowance, future taxable income exclusive of reversing temporary differences and carryforwards (see paragraph 740-10-30-18(b)) need not be considered because the $16,000 operating loss carryforward will offset the acquired entity's $7,000 of taxable temporary differences and another $9,000 of the acquiring entity's taxable temporary differences. The amounts recorded to account for the purchase transaction are as follows.
","snippet":"In assessing the need for a valuation allowance, future taxable income exclusive of reversing temporary differences and carryforwards (see paragraph 740-10-30-18(b)) need not be considered because the $16,000 operating l…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:02728627808837ea049380d4b45a63595dbe1b2cc7c320756fbf059eb86f498a","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-9","para":"55-9","html":"
This Example illustrates the guidance in paragraphs
805-740-25-8 through 25-9
on accounting for the tax consequences of goodwill when tax-deductible goodwill exceeds the goodwill recorded for financial reporting at the acquisition date. The assumptions are as follows:
  1. a
    At the acquisition date, the reported amount of goodwill for financial reporting purposes is $600 before taking into consideration the tax benefit associated with goodwill and the tax basis of goodwill is $900.
  2. b
    The tax rate is 40 percent for all years.
","snippet":"This Example illustrates the guidance in paragraphs 805-740-25-8 through 25-9 on accounting for the tax consequences of goodwill when tax-deductible goodwill exceeds the goodwill recorded for financial reporting at the a…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:1743972b73692f48162d25fce02aac27d9dd7bcf920390ebc3a6953c1a15d92e","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-10","para":"55-10","html":"
As of the acquisition date, the goodwill for financial reporting purposes is adjusted for the tax benefit associated with goodwill by using the following simultaneous equations method. In the following equation, the Preliminary Temporary Difference variable is the excess of tax goodwill over book goodwill, before taking into consideration the tax benefit associated with goodwill, and the Deferred Tax Asset variable is the resulting deferred tax asset.
","snippet":"As of the acquisition date, the goodwill for financial reporting purposes is adjusted for the tax benefit associated with goodwill by using the following simultaneous equations method. In the following equation, the Prel…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:ba825f3ac57c811195ab7608e3a80d4eeee0982e5e5549e8cf32460a7d38b0ef","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-11","para":"55-11","html":"
In this Example, the following variables are known:
","snippet":"In this Example, the following variables are known:\nTax rate = 40 percent\nPreliminary Temporary Difference = $300 ($900 − $600)","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:e853ff9d15bb2d2d1d6127bd4c4b5568c9316d0a11c3170425cedd5bb330d930","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-12","para":"55-12","html":"
The unknown variable (Deferred Tax Asset) equals $200, and the goodwill for financial reporting purposes would be adjusted with the following entry.
","snippet":"The unknown variable (Deferred Tax Asset) equals $200, and the goodwill for financial reporting purposes would be adjusted with the following entry.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:9644f7211f1bc087ba091a097da8c8ce07c3f602cb023d7a4a09e38dea8b80d9","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},{"citation":"740-805-55-13","para":"55-13","html":"
Goodwill for financial reporting would be established at the acquisition date at $400 ($600 less the $200 credit adjustment).
","snippet":"Goodwill for financial reporting would be established at the acquisition date at $400 ($600 less the $200 credit adjustment).","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:47d26bdc9dab7e6623512013ba8a87da3cbfadcdb65b7f7fa2fcd6650afac556","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}}],"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:f75bd3ed45c9c1059d9a8474b4318e66779abd28f9f19b9867eb7de7b7f35d43","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}}],"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:0f7bb656cb7260d7ecc75b0e764dc8dbf61aa2e06a5f0fabda41f77b4416eaf3","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}},"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:0f7bb656cb7260d7ecc75b0e764dc8dbf61aa2e06a5f0fabda41f77b4416eaf3","downloaded_from":"2026-09-10T01:18:32.090Z","last_downloaded_at":"2026-09-10T01:18:32.090Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147478064","source_sha256":"88a5bd358a7ba9a830d66cae6d90e579cd5debc28587bdae0956cdfbd9dcf857"}}