Deferred tax gets harder when a group is involved. When a parent buys a subsidiary, it restates the subsidiary’s assets and liabilities to fair value, but the tax authority does not. The profits of a subsidiary can be taxed again when they are paid up as dividends. Goods sold inside the group carry profit that the seller has already been taxed on but the group has not yet earned.
And two rules that students often find odd, the exception for goodwill and the exception for initial recognition, were narrowed by an amendment for leases and decommissioning costs.
This topic covers deferred tax in business combinations, unremitted earnings, unrealised intra-group profit, a change in the acquirer’s own deferred tax asset, the amendment on single transactions, the temporary exception for Pillar Two taxes, and the tax reconciliation and other disclosures. The previous topic covered current tax, temporary differences and the basic rules of International Accounting Standard (IAS) 12.
In 30 seconds
In an acquisition, fair value adjustments do not change the tax base, so they create temporary differences and deferred tax is recognised on them in the acquisition accounting. This deferred tax reduces the net assets acquired and so increases goodwill, but there is no deferred tax on the goodwill itself.
Unremitted earnings of a subsidiary, associate or joint venture create deferred tax unless the parent can control the timing of the reversal and it is probable it will not reverse soon. Unrealised intra-group profit gives a deferred tax asset at the buyer’s tax rate. A change in whether the acquirer’s own deferred tax asset is recoverable is recognised in the period but not in goodwill.
Since 1 January 2023, the initial recognition exception does not apply to transactions that give equal taxable and deductible differences, such as leases and decommissioning obligations, so both the deferred tax asset and liability are recognised. There is a mandatory temporary exception for deferred tax on Pillar Two taxes. Entities reconcile tax expense with accounting profit and disclose the components.
Key terms in plain English
| Term | What it means |
|---|---|
| Fair value adjustment | A change made on consolidation to restate the subsidiary’s assets and liabilities to fair value at the acquisition date |
| Unremitted earnings | Profits of a subsidiary or associate that have not yet been paid up to the parent as dividends |
| Unrealised profit | Profit on goods sold within the group that are still held by the group |
| Initial recognition exception | The rule that no deferred tax is recognised on certain differences arising when an asset or liability is first recorded |
| Pillar Two | The international model rules that set a global minimum tax rate for large multinational groups |
| Effective tax rate | Tax expense divided by accounting profit before tax |
| Applicable tax rate | The statutory rate that the reconciliation starts from |
Syllabus check
IAS 12 is examinable under syllabus area B and in the group sections of area C. This topic covers:
- deferred tax on fair value adjustments, goodwill, unremitted earnings and unrealised profits;
- the amendment on deferred tax related to assets and liabilities from a single transaction;
- the Pillar Two exception, which the syllabus learning outcomes mention;
- the tax reconciliation and disclosures.
CAMA 2020 and group tax
The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view.
| Section | What it says | Link to deferred tax in groups |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare statements that follow IFRS and give a true and fair view | Group statements apply IAS 12 to acquisitions and intra-group items |
| ss. 379 to 381 | A holding company prepares group statements | The consolidation adjustments carry deferred tax |
| s. 374(1) | The company keeps accounting records | Fair value workings, tax bases and dividend plans are evidence for the deferred tax |
| s. 404(7) | The audit committee reviews policies and internal control | It reviews the judgement on recoverability of deferred tax assets |
Business combinations
When a parent acquires a subsidiary, IFRS 3 requires the subsidiary’s identifiable assets and liabilities to be measured at fair value. The tax authority usually keeps the old tax base. So a fair value uplift creates a taxable temporary difference and a write-down creates a deductible one. Deferred tax is recognised on all of them (subject to the usual probability test for assets), as part of the acquisition accounting.
No separate journal is needed: the adjustment is part of the consolidation workings.
Effect on goodwill
Goodwill is the balancing figure. Net identifiable assets are after deferred tax, so a net deferred tax liability reduces net assets and increases goodwill. A net deferred tax asset reduces it. There is no deferred tax on the goodwill itself, because of the initial recognition exception, which stops the circular effect.
Unremitted earnings
A parent that owns a subsidiary, associate or joint venture can receive its share of the profits as dividends. A temporary difference exists on the undistributed post-acquisition profits, equal to the difference between the carrying amount of the investment in the consolidated statements and its tax base. If the receipt of dividends will be taxed, a deferred tax liability arises.
No deferred tax liability is recognised if:
- the parent (or investor) can control the timing of the reversal; and
- it is probable that the difference will not reverse in the foreseeable future.
A parent normally controls a subsidiary’s dividend policy, so a liability is rarely recognised for subsidiaries. For an associate, the investor cannot control distributions, so a liability is usually recognised unless there is an agreement that profits will not be distributed.
Unrealised intra-group profit
On consolidation, profit on goods sold within the group that are still in inventory at the year end is eliminated. The seller has already paid tax on that profit in its own accounts. In the group accounts the profit has not been earned.
The carrying amount of the goods in the group is lower than their tax base (the buyer’s cost), so there is a deductible temporary difference and a deferred tax asset. It is measured at the buyer’s tax rate, because the buyer will get the deduction when it sells the goods outside the group.
Change in the acquirer’s own deferred tax asset
An acquirer may have a deferred tax asset (for example, unused tax losses) that it did not recognise because future taxable profit was not probable. After the acquisition it may gain access to the acquiree’s taxable profits, so recovery becomes probable. The acquirer recognises the asset in the period of the combination as a credit to profit or loss.
It is not part of the acquisition accounting and does not affect goodwill. (A deferred tax asset of the acquiree that was not recognised at the date of acquisition, but later meets the criteria, is treated differently.)
Note: ICAN’s notes describe this as part of the business combination accounting but also say it does not affect goodwill. IAS 12 says the change is recognised in the period of the combination but is not part of the accounting for it, so we teach it that way. In the exam, state clearly that goodwill is not adjusted.
The amendment on single transactions
Before the amendment, the initial recognition exception applied separately to the asset and the liability in transactions that affect neither accounting nor taxable profit. For a lease, a lessee records a right-of-use asset and a lease liability of the same amount. If tax deducts the lease payments, the asset has a taxable difference and the liability has an equal deductible difference.
Applying the exception to each separately meant that no deferred tax was recognised for either, which left a gap.
In May 2021 the International Accounting Standards Board changed the rule. The exception does not apply to transactions that give rise to equal taxable and deductible temporary differences at initial recognition. This covers leases (right-of-use asset and lease liability) and decommissioning obligations (and the related cost in the asset).
- Effective: annual periods beginning on or after 1 January 2023, with earlier use allowed.
- Transition: applies to transactions on or after the start of the earliest comparative period presented. Deferred tax assets and liabilities for leases and decommissioning at the start of that period are recognised, with the cumulative effect as an adjustment to retained earnings (or another component of equity).
- A deferred tax asset is recognised only if future taxable profit is probable, and the two balances are offset only if the offset conditions are met.
Pillar Two taxes
In May 2023 the International Accounting Standards Board added a mandatory temporary exception to IAS 12 for deferred tax related to Pillar Two income taxes. An entity does not recognise or disclose deferred tax assets and liabilities arising from them. It must disclose that it has applied the exception, and disclose its current tax expense related to Pillar Two.
Where legislation has been enacted but is not yet in effect, it discloses known or reasonably estimable information about its exposure.
Tax reconciliation and other disclosures
An entity explains the relationship between tax expense and accounting profit, using either:
- a reconciliation of tax expense to accounting profit × applicable tax rate, stating how the rate is arrived at; or
- a reconciliation of the effective rate to the applicable rate.
It also explains changes in the applicable rate.
Other disclosures include the income tax consequences of dividends proposed or declared after the reporting date but before the statements are authorised, and the amount and evidence for a deferred tax asset when its recognition depends on future profits above those from reversing taxable differences, or when the entity has made a loss in the current or prior period in the same jurisdiction.
The rules in more depth
Why the group exceptions exist
The parent controls whether subsidiary profits are paid up, so recognising tax on them would show a liability the parent can avoid. For an associate, the parent cannot avoid it.
Why use the buyer’s rate
The temporary difference reverses in the buyer’s tax computation when it sells the goods. The seller’s rate is irrelevant to that.
Why the amendment matters
Without it, a lessee with a deductible lease would show no deferred tax at all, even though the tax effect of a long lease is real. With it, the gross asset and liability are shown and, because they are equal at the start, the net effect on profit at the start is nil.
Effect on analysis
Effective tax rates reflect permanent differences, rate changes, unrecognised assets and group structure. Analysts look at the reconciliation to see whether a low rate is sustainable.
Worked examples
Example 1: fair value adjustments and goodwill (100% acquisition). P Ltd buys 100% of S for ₦600,000 on 31 December 20X6. At fair value, the net assets before deferred tax are ₦504,000. The temporary differences between fair value and tax base total ₦140,000 (property ₦120,000, inventory ₦50,000, pension liability ₦(30,000)). The rate is 30%. Before the fair value exercise, S had a deferred tax liability of ₦9,000 on its own difference of ₦30,000.
- Deferred tax on all temporary differences.
₦140,000 × 30% = ₦42,000.
This replaces S’s own ₦9,000, so the increase on consolidation is ₦33,000. - Net assets after deferred tax.
₦504,000 − ₦42,000 = ₦462,000. - Goodwill = ₦600,000 − ₦462,000 = ₦138,000.
Example 2: 80% acquisition with contingent liability. Tolaram Plc buys 80% of NuroTech Ltd for ₦380m. NuroTech’s book net assets are ₦400m. Fair value adjustments: property plus ₦50m, inventory plus ₦20m, and an unrecorded contingent liability of ₦10m recognised. None is recognised for tax and the rate is 30%. Non-controlling interest is measured at its proportionate share of net assets.
- Fair value of net assets.
₦400m + ₦50m + ₦20m − ₦10m = ₦460m. - Deferred tax liability.
property ₦50m × 30% = ₦15m, inventory ₦20m × 30% = ₦6m.
Deferred tax asset on the contingent liability: ₦10m × 30% = ₦3m (deductible when paid).
Net liability = ₦18m. - Net assets after deferred tax.
₦460m − ₦18m = ₦442m. - Non-controlling interest.
20% × ₦442m = ₦88.4m. - Goodwill = ₦380m + ₦88.4m − ₦442m = ₦26.4m.
The deferred tax liability is not added to goodwill. It reduces net assets, and goodwill is higher as a result.
Example 3: unremitted earnings of an associate. A parent has a 30% associate. Its share of post-acquisition profit is ₦100,000. Dividends received would be taxed at 10% and there is no agreement that profits will be retained.
- Temporary difference = ₦100,000 (carrying amount above tax base).
- Deferred tax liability.
₦100,000 × 10% = ₦10,000. - For a subsidiary, if the parent controls dividends and no distribution is planned, no liability is recognised.
Example 4: unrealised profit. P sells goods costing ₦80,000 to its subsidiary S for ₦120,000. All remain in S’s inventory at the year end. S pays tax at 30% and P at 25%.
- Unrealised profit eliminated = ₦40,000.
- Group carrying amount = ₦80,000. Tax base = ₦120,000 (S’s cost). Deductible difference = ₦40,000.
- Deferred tax asset.
₦40,000 × 30% (the buyer’s rate) = ₦12,000. - Consolidation entry: Dr deferred tax asset ₦12,000; Cr tax expense ₦12,000.
Example 5: a lease and the amendment. A lessee takes a 5-year lease at ₦100 a year. The present value at 5% is ₦433 (all figures in ₦’000). Tax deducts the payments as paid. The rate is 30%.
- Right-of-use asset ₦433, tax base nil: taxable difference ₦433, deferred tax liability ₦130.
- Lease liability ₦433, tax base nil: deductible difference ₦433, deferred tax asset ₦130.
- Net effect on profit at the start = nil. Before the amendment, neither would be recognised.
- After year 1: liability ₦433 + ₦21.7 interest − ₦100 = ₦354.6, asset ₦433 − ₦86.6 = ₦346.4.
Deferred tax asset ₦106.4, liability ₦103.9.
The net asset of ₦2.5 is a credit to tax expense.
Total tax relief = ₦30 current + ₦2.5 deferred = ₦32.5 = 30% of the ₦108.3 lease expense.
Example 6: tax reconciliation. B Plc has accounting profit of ₦500,000, which includes non-taxable income of ₦20,000. Depreciation is ₦100,000 and tax allowances are ₦150,000. The rate is 30%.
- Taxable profit.
₦500,000 + ₦100,000 − ₦20,000 − ₦150,000 = ₦430,000.
Current tax = ₦129,000. - Temporary difference = ₦50,000. Deferred tax = ₦15,000. Total tax expense = ₦144,000.
- Reconciliation.
₦500,000 × 30% = ₦150,000, less 30% × ₦20,000 non-taxable income = ₦(6,000), tax expense ₦144,000. - Effective rate.
₦144,000 ÷ ₦500,000 = 28.8%, which is 30% less 1.2% for the permanent difference.
How to score full marks
- Fair value adjustments: list each, compare to the tax base, compute deferred tax, then reduce net assets.
- Show goodwill after the deferred tax, and say there is no deferred tax on goodwill itself.
- For intra-group profit, state the buyer’s rate and that the difference is deductible.
- For unremitted earnings, test control of timing and probability of reversal.
- For leases, show the asset and liability gross and state the amendment.
- For reconciliations, start from accounting profit × rate and list each item that moves it.
Common mistakes in the exam
- Recognising deferred tax on goodwill itself.
- Forgetting to deduct deferred tax from net assets before goodwill, or adding it to goodwill instead.
- Using the seller’s rate for unrealised profit.
- Recognising deferred tax on a subsidiary’s retained profits when the parent controls dividends.
- Adjusting goodwill for a change in the acquirer’s own deferred tax asset.
- Applying the old exception to lease assets and liabilities after 1 January 2023.
- Starting the reconciliation from taxable profit instead of accounting profit.
- Forgetting that the contingent liability creates a deferred tax asset.
Quick revision
- Fair value adjustments create temporary differences. Deferred tax reduces net assets and raises goodwill. None on goodwill itself.
- Unremitted earnings: no liability if the parent controls timing and reversal is improbable. Associates usually need one.
- Unrealised profit: deferred tax asset at the buyer’s rate.
- Acquirer’s own asset: recognised in the period, not in goodwill.
- Leases and decommissioning: no initial recognition exception since 1 January 2023. Recognise both the asset and the liability.
- Pillar Two: mandatory temporary exception. Disclose that it applies and the current tax.
- Reconciliation: accounting profit × rate, or effective rate to applicable rate.
- CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 404(7).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. A fair value uplift on a subsidiary’s property on acquisition, with no change in tax base, creates:
- A deductible difference
- A taxable temporary difference
- No difference
- A permanent difference
Show the answer
B. A deferred tax liability is recognised.
Question 2. A net deferred tax liability on fair value adjustments, compared with ignoring it, makes goodwill:
- Lower
- Higher
- The same
- Nil
Show the answer
B. Net assets acquired are lower.
Question 3. Deferred tax on unrealised intra-group profit is measured at:
- The seller’s tax rate
- The buyer’s tax rate
- The parent’s rate
- Zero
Show the answer
B. The buyer will get the deduction on external sale.
Question 4. No deferred tax liability on a subsidiary’s retained profits is recognised if the parent:
- Owns over 50%
- Controls the timing and reversal is improbable
- Has a tax loss
- Uses equity accounting
Show the answer
B. Both conditions are needed.
Question 5. After an acquisition, the acquirer’s unrecognised deferred tax asset becomes recoverable. It is recognised:
- In goodwill
- In the period, but not in goodwill
- Never
- Retrospectively
Show the answer
B. It is not part of the acquisition accounting.
Question 6. The amendment on single transactions removes the initial recognition exception for:
- All assets
- Transactions with equal taxable and deductible differences, such as leases
- Goodwill
- Inventory
Show the answer
B. Effective 1 January 2023.
Question 7. The Pillar Two exception in IAS 12 is:
- Optional
- A mandatory temporary exception to recognising deferred tax on Pillar Two taxes
- Permanent
- Only for banks
Show the answer
B. The entity discloses that it applies it.
Question 8. A tax reconciliation starts from:
- Taxable profit
- Accounting profit multiplied by the applicable rate
- Tax paid
- Revenue
Show the answer
B. Or the effective rate to the applicable rate.
Question 9. Income that is never taxable makes the effective rate:
- Higher than the applicable rate
- Lower than the applicable rate
- Equal
- Zero
Show the answer
B. It is a permanent difference.
Question 10. Which sections of CAMA 2020 deal with group financial statements?
- Sections 379 to 381
- Sections 404 to 406
- Sections 409 to 413
- Sections 374(1) only
Show the answer
A. IAS 12 applies to group statements.
Written questions
Question 11 (10 marks). (a) Explain why fair value adjustments on acquisition create deferred tax and how this affects goodwill. (5 marks) (b) Explain when deferred tax is recognised on the unremitted earnings of subsidiaries and associates. (5 marks)
Question 12 (20 marks). (a) Alpha Plc acquires 80% of Beta Ltd for ₦600m. Beta’s book net assets are ₦400m. Fair value adjustments: property plus ₦100m and inventory plus ₦30m, with no change in tax bases. The rate is 30% and non-controlling interest is measured at its proportionate share. Calculate goodwill. (8 marks) (b) P sells goods costing ₦80,000 to S for ₦120,000. All are unsold at the year end.
S’s tax rate is 30% and P’s is 25%. Calculate the deferred tax on the unrealised profit. (3 marks) (c) A lessee takes a 5-year lease at ₦100,000 a year with a present value of ₦433,000, and tax deducts payments as paid. The rate is 30%. Explain the effect of the amendment on single transactions and calculate the deferred tax.
(5 marks) (d) A company has accounting profit of ₦600,000, including non-deductible expenses of ₦40,000 and no timing differences. The rate is 30%. Prepare the tax reconciliation and state the effective rate. (4 marks)
Question 13 (10 marks). Ade Plc has unused tax losses of ₦300m on which it recognised no deferred tax asset. It acquires Bello Ltd, whose taxable profits make recovery of the losses probable. (a) Explain the accounting treatment. (4 marks) (b) Explain the temporary exception for Pillar Two taxes. (3 marks) (c) State the disclosures about dividends and about recognised deferred tax assets that depend on future profits. (3 marks)
Model answers
Show the model answer to Question 11
(a) Fair value adjustments (5 marks). On acquisition the subsidiary’s identifiable assets and liabilities are measured at fair value, but their tax bases do not change. (1.5) The differences are temporary differences, so deferred tax is recognised on them in the acquisition accounting (a liability for uplifts, an asset for write-downs if recovery is probable). (1.5) The net deferred tax liability reduces net identifiable assets, so goodwill is higher. (1.5) No deferred tax is recognised on goodwill itself. (0.5)
(b) Unremitted earnings (5 marks). A temporary difference arises on undistributed post-acquisition profits of subsidiaries, associates and joint ventures. (1.5) A deferred tax liability is recognised if future dividends will be taxed, unless the parent controls the timing of the reversal and it is probable that the difference will not reverse in the foreseeable future. (2) For subsidiaries the parent normally controls dividends, so a liability is rare.
(0.75) For associates the investor does not control distributions, so a liability is usually recognised, unless there is an agreement not to distribute. (0.75)
Show the model answer to Question 12
(a) Goodwill (8 marks).
- Fair value of net assets.
₦400m + ₦100m + ₦30m = ₦530m. (2) - Deferred tax liability.
₦130m × 30% = ₦39m. (2) - Net assets after deferred tax = ₦491m. (1)
- Non-controlling interest.
20% × ₦491m = ₦98.2m. (1.5) - Goodwill = ₦600m + ₦98.2m − ₦491m = ₦207.2m. (1.5)
(b) Unrealised profit (3 marks). Unrealised profit = ₦40,000. (1) Deductible difference = ₦40,000 (group carrying amount ₦80,000, tax base ₦120,000). (1) Deferred tax asset at the buyer’s rate of 30% = ₦12,000. (1)
(c) Lease (5 marks). The amendment removes the initial recognition exception for transactions that give equal taxable and deductible differences, such as leases, from 1 January 2023. (2) The right-of-use asset has a taxable difference of ₦433,000, a deferred tax liability of ₦129,900. (1.5) The lease liability has a deductible difference of ₦433,000, a deferred tax asset of ₦129,900, recognised if future profit is probable.
The net effect on profit at the start is nil, and they are offset only if the conditions are met. (1.5)
(d) Reconciliation (4 marks).
- Expected tax.
₦600,000 × 30% = ₦180,000. (1) - Add tax on non-deductible expenses.
₦40,000 × 30% = ₦12,000. (1.5) - Tax expense = ₦192,000. (0.5)
- Effective rate.
₦192,000 ÷ ₦600,000 = 32%. (1)
Show the model answer to Question 13
(a) Acquirer’s asset (4 marks). The probability of recovering the acquirer’s own losses has changed because of the acquisition. (1) It recognises a deferred tax asset on the ₦300m of losses (at the enacted rate) in the period of the combination. (1.5) The credit goes to profit or loss. It is not part of the acquisition accounting, so it does not affect goodwill. (1.5)
(b) Pillar Two (3 marks). There is a mandatory temporary exception to recognising and disclosing deferred tax assets and liabilities related to Pillar Two income taxes. (1.5) The entity discloses that it has applied the exception and its current tax expense related to Pillar Two. (1) Where legislation is enacted but not yet in effect, it discloses known or reasonably estimable exposure. (0.5)
(c) Disclosures (3 marks). The income tax consequences of dividends proposed or declared after the reporting date but before the statements are authorised. (1) The amount of a deferred tax asset and the evidence supporting it when it depends on future taxable profits above those from reversing differences, or when the entity has a recent loss in the same jurisdiction. (2)
Pathfinder on IAS 12 deferred tax in groups
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The group tax charge is reduced by deferred tax at 30% on unrealised profit: ₦120m × 30% = ₦36m on the bandwidth sale and ₦640m × 30% = ₦192m on the equipment. Worked example 4 shows the buyer’s rate rule behind this. There is no stand-alone IAS 12 question in the latest Pathfinders. Note: ICAN’s notes say a change in the acquirer’s own deferred tax asset is part of the business combination accounting, which is slightly different from ours. IAS 12 says it is recognised in the period but not in goodwill.
Revise first: Unrealised intra-group profit
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: No stand-alone IAS 12 question identified in the November Diet, 2025 or May Diet, 2026 Pathfinders.
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