# ASC 740-805-55: Income Taxes — Business Combinations — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/740/805/#55-implementation-guidance-and-illustrations)

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.

Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure.

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:0f7bb656cb7260d7ecc75b0e764dc8dbf61aa2e06a5f0fabda41f77b4416eaf3

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


## ASC 740-805-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/740/805/#55-implementation-guidance-and-illustrations)

SEC content: no

##### [740-805-55-1](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-1)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:47416f997d47717cd45533bc3dd02fced7b372f9a88c05f2b78a23bce1b42c64

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


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](https://asc.understandingaccounting.org/glossary/i/#income-taxes "Domestic and foreign federal (national), state, and local (including franchise) taxes based on income.") in connection with [business combinations](https://asc.understandingaccounting.org/glossary/b/#business-combination "A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. See also Acquisition by a Not-for-Profit Entity."). The illustrations that follow make various assumptions about the tax law. These assumptions about the tax law are for illustrative purposes only.

#### Illustrations

##### [740-805-55-2](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-2)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:33e32b5054564bde3954efda33f1940d19b9d7095b7b876b5b75477505a46085

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


This Example illustrates the guidance in paragraphs

[805-740-25-2 through 25-3](https://asc.understandingaccounting.org/asc/740/805/#740-805-25-2)

and [805-740-30-1](https://asc.understandingaccounting.org/asc/740/805/#740-805-30-1) relating to the recognition and measurement of a [deferred tax liability](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-liability "The deferred tax consequences attributable to taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted tax law.") and [deferred tax asset](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-asset "The deferred tax consequences attributable to deductible temporary differences and carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.") 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](https://asc.understandingaccounting.org/glossary/g/#goodwill "An asset representing the future economic benefits arising from other assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are not individually identified and separately recognized. For ease of reference, this term also includes the immediate charge recognized by not-for-profit entities in accordance with paragraph 958-805-25-29.") 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](https://asc.understandingaccounting.org/glossary/v/#valuation-allowance "The portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.") is necessary.

##### [740-805-55-3](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-3)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:06b12254a287f77afdd40f8c2a4cff06b40990233756bf306bd7c5f36d23481a

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


The amounts recorded to account for the business combination transaction are as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-C109C0BA-D796-40DB-920D-62D26EF577CB-low.gif)
    
    Recognized value of the net assets (other than goodwill) acquired " $12,000 " "Deferred tax liability for $20,000 of taxable temporary differences" " (8,000)" "Deferred tax asset for $13,000 of deductible temporary differences" " 5,200 " Goodwill " 10,800 " Consideration paid for the acquiree " $20,000 "

##### [740-805-55-4](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-4)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:e6d637864a90311365630268ec2cd10ea313eb2a3fe7290e94306b101ee2aef8

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


This Example illustrates the guidance in paragraphs [805-740-25-3](https://asc.understandingaccounting.org/asc/740/805/#740-805-25-3) and [805-740-45-2](https://asc.understandingaccounting.org/asc/740/805/#740-805-45-2) relating to the recognition of a deferred tax asset and the related valuation allowance for acquired [deductible temporary differences](https://asc.understandingaccounting.org/glossary/d/#deductible-temporary-difference "Temporary differences that result in deductible amounts in future years when the related asset or liability is recovered or settled, respectively. See Temporary Difference.") 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](https://asc.understandingaccounting.org/glossary/c/#carryforwards "Deductions or credits that cannot be utilized on the tax return during a year that may be carried forward to reduce taxable income or taxes payable in a future year. An operating loss carryforward is an excess of tax deductions over gross income in a year; a tax credit carryforward is the amount by which tax credits available for utilization exceed statutory limitations. Different tax jurisdictions have different rules about whether excess deductions or credits may be carried forward and the length of the carryforward period. The terms carryforward, operating loss carryforward, and tax credit carryforward refer to the amounts of those items, if any, reported in the tax return for the current year.") to subsequent [taxable income](https://asc.understandingaccounting.org/glossary/t/#taxable-income "The excess of taxable revenues over tax deductible expenses and exemptions for the year as defined by the governmental taxing authority.") 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.
    
    -   ![](https://asc.understandingaccounting.org/asc-img/GUID-C662A027-0ECC-4994-A26A-0F2C27FC6102-low.gif)
        
        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)"
        
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.

##### [740-805-55-5](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-5)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:416d449638c7de2c2d5c161ce0ca5ff7475b11a7cb754f88800800dc5c1cc6ef

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


The acquired entity's pretax financial income and taxable income for Year 3 (after the business combination) and Year 4 are as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-7583C246-D22B-427F-BFAE-98A21C2BE95C-low.gif)
    
    Year 3 Year 4 Pretax financial income " $15,000 " " $10,000 " Reversals of acquired deductible temporary differences " (15,000)" " (10,000)" Taxable income $- $-

##### [740-805-55-6](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-6)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:62906393b38a9bccc4faea33235fe703c1fd4b1005b8e57bc05326e7cd233e4e

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


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](https://asc.understandingaccounting.org/asc/740/805/#740-805-45-2)). 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.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-6B9A488E-53A1-4511-B4CB-909E62E200A5-low.gif)
    
    Year 3 Year 4 Pretax financial income " $15,000 " " $10,000 " Income tax expense (benefit): Current - - Deferred - " (6,000)" Net income " $15,000 " " $16,000 "

##### [740-805-55-7](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-7)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:f8b11ea51edd6364fe098d9b155138f59443bc722a5d6c276c28062584b5ef5f

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


This Example illustrates the guidance in paragraph [805-740-25-3](https://asc.understandingaccounting.org/asc/740/805/#740-805-25-3) 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](https://asc.understandingaccounting.org/glossary/t/#taxable-temporary-difference "Temporary differences that result in taxable amounts in future years when the related asset is recovered or the related liability is settled. See Temporary Difference.") 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.

##### [740-805-55-8](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-8)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:02728627808837ea049380d4b45a63595dbe1b2cc7c320756fbf059eb86f498a

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


In assessing the need for a valuation allowance, future taxable income exclusive of reversing [temporary differences](https://asc.understandingaccounting.org/glossary/t/#temporary-difference "A difference between the tax basis of an asset or liability computed pursuant to the requirements in Subtopic 740-10 for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Paragraph 740-10-25-20 cites examples of temporary differences. Some temporary differences cannot be identified with a particular asset or liability for financial reporting (see paragraphs 740-10-05-10 and 740-10-25-24740-10-25-25), but those temporary differences do meet both of the following conditions: Result from events that have been recognized in the financial statements Will result in taxable or deductible amounts in future years based on provisions of the tax law. Some events recognized in financial statements do not have tax consequences. Certain revenues are exempt from taxation and certain expenses are not deductible. Events that do not have tax consequences do not give rise to temporary differences.") and carryforwards (see paragraph [740-10-30-18(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) 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.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-2920A900-5681-4A94-88DF-4B1545A97E80-low.gif)
    
    Assigned value of the identified net assets acquired " $12,000 " "Deferred tax liability recognized for the acquired entity's taxable temporary differences ($7,000 at 40 percent)" " (2,800)" "Deferred tax asset recognized for the acquired loss carryforward based on offset against the acquired company's taxable temporary differences ($7,000 at 40 percent)" " 2,800 " "Deferred tax asset recognized for the acquired loss carryforward based on offset against the acquiring entity's taxable temporary differences ($9,000 at 40 percent)" " 3,600 " Goodwill " 4,400 " Purchase price of the acquired entity " $20,000 "

##### [740-805-55-9](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-9)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:1743972b73692f48162d25fce02aac27d9dd7bcf920390ebc3a6953c1a15d92e

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


This Example illustrates the guidance in paragraphs

[805-740-25-8 through 25-9](https://asc.understandingaccounting.org/asc/740/805/#740-805-25-8)

on accounting for the [tax consequences](https://asc.understandingaccounting.org/glossary/t/#tax-consequences "The effects on income taxes—current or deferred—of an event.") of goodwill when tax-deductible goodwill exceeds the goodwill recorded for financial reporting at the [acquisition date](https://asc.understandingaccounting.org/glossary/a/#acquisition-date "The date on which the acquirer obtains control of the acquiree."). 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.

##### [740-805-55-10](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-10)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:ba825f3ac57c811195ab7608e3a80d4eeee0982e5e5549e8cf32460a7d38b0ef

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


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.

-   (Tax Rate ÷ \[1 − Tax Rate\]) × Preliminary Temporary Difference = Deferred Tax Asset

##### [740-805-55-11](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-11)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:e853ff9d15bb2d2d1d6127bd4c4b5568c9316d0a11c3170425cedd5bb330d930

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


In this Example, the following variables are known:

-   Tax rate = 40 percent
    
-   Preliminary Temporary Difference = $300 ($900 − $600)

##### [740-805-55-12](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-12)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:9644f7211f1bc087ba091a097da8c8ce07c3f602cb023d7a4a09e38dea8b80d9

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


The unknown variable (Deferred Tax Asset) equals $200, and the goodwill for financial reporting purposes would be adjusted with the following entry.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-14B013F6-1DEE-44E5-B4E3-0378FFA67919-low.gif)
    
    Deferred tax asset 200 Goodwill 200

##### [740-805-55-13](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-13)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:18:32.090Z to 2026-09-10T01:18:32.090Z

Record version: sha256:47d26bdc9dab7e6623512013ba8a87da3cbfadcdb65b7f7fa2fcd6650afac556

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Goodwill for financial reporting would be established at the acquisition date at $400 ($600 less the $200 credit adjustment).