It's often the case that assets step ups lead to deferred tax in m&a. The question is why so let's explain it.

Well tax authorities recognize asset step ups and internally generated intangibles for tax purposes.

But only in asset deals.

When an acquire abides the assets of a Target, that's fine. We'll deal with the assets step ups will recognize all this the tax authorities. Haven't got a problem.

However, the asset step ups during a share deal create deferred tax liabilities, and that's what we need to explore in a bit more detail.

Let's look at it with an example.

Here, we've got an asset. It's values 40 and we can see over its life its value is going to be gradually decreased down to zero and we can see there's straight line depreciation happening there.

However at some point during its life when it's valued at about 25.

We're going to find that the company is acquired fantastic and during the acquisition we're going to find that the asset is stepped up in value here stepped up from 25 to 60.

It's at this point that the tax authorities and the company have a difference of opinion.

The tax authorities view of value and appreciation is that it just carries on on that straight line from 25 down to zero.

They pretend that the asset Step Up didn't happen.

But the company has completely different view the company's view of value and depreciation is that it is now worth 60 and will be depreciated from 60 down to zero.

It's this difference of opinion that's going to lead us to deferred tax what may happen at some point in the future of this asset's life is the asset itself may be sold.

Let's imagine here that it's going to be sold. And the tax authorities would say are we think the asset was worth 20? It's just been sold for 45.

Well, if the steps up asset were sold.

Hacks would be owed on the gain.

And it's these potential gains in the future that lead to potential deferred tax liability and the company has to recognize that defer tax liability when it does the Step Up.

However, you might notice that as the asset gets old Renault and older those potential gains gradually get smaller and smaller and smaller again.

So the divertax liability is Unwound over the period of depreciation and amortization.

For this reason we need to model out the Deferred tax liability in an m&a model and we often see it as a separate line item in the balance sheet.

The Deferred tax liability or dtl also reduces the Goodwill generated. We need to remember here to use the target MTR or module tax rate for calculation of that dtl as it's the target assets that are being stepped up.

So we've summarized deferred tax. We now move on to a little bit about Goodwill.

Goodwill is way take the purchase price of a Target minus the fair value of its identifiable net assets. What does that mean? Well fair value of identifiable net assets means the target comfy financial needs to be stepped up to fair value and that's going to help you find their identifiable and their asset value.

That also means you get to recognize internally generated intangible brand names customer Etc. They're often held on about she added value of zero. So now we get to recognize them for the first time existing Target Goodwill is also tested for impairment and rolled up into new Goodwill. Remember the identifiable net assets. We need to find those identified when an assets so we can get rid of the old Goodwill replace it with new Goodwill that we can identify ourselves.

And lastly accountants have up to 12 months post acquisition to a men's at the Goodwill calculation.