How is deferred income tax calculated in a share purchase acquisition?

In a share purchase acquisition, deferred income tax is calculated by focusing on the difference between the fair value (FV) and the book value (BV) of the acquired assets. When assets are purchased at a price that differs from their recorded book value, this creates a temporary difference that can result in a deferred tax asset or liability.

The fair value of the assets usually reflects their market value at the time of acquisition, while the book value reflects their historical cost. The difference between these two values is then multiplied by the applicable tax rate to determine the deferred income tax. This process is important because it helps to ensure that the financial statements reflect the true tax implications of the acquisition, aligning with the accounting principle of matching.

By using this approach, companies can accurately report the tax effects of their acquisitions, which can impact their future tax obligations when the temporary differences reverse. This method aligns well with the principles of accounting and taxation, providing clarity on how these differences will be settled in future periods.