I'm absolutely clueless on purchase accounting and haven't found current threads of much use, particularly on (D&A) step-ups and associated DTL's. Any info on financing fees would also be useful.
As for the step-ups, why do they exist and how does the purchase method (stock/cash/asset sale/RMT) affect the tax liability? What is section 338 and how does that play into all this?
In terms of the DTL and how it arises, I don't quite understand how the liability is "unwound". Would a subsequent sale be necessary or do the differences in book/tax depreciation reconcile over time?
Thank you for all the help.
Would recommend you read the 3-part purchase price accounting primer here (the other M&A accounting sections will also address all your other questions above): http://macabacus.com/accounting/purchase-price-allocation1
Quickly, there are essentially three types of deals, stock/asset/stock with 338h election. For stock deals, for tax purposes the assets are transferred at their current value but written up for book purposes. This is what creates the deferred tax liability since you will be depreciating faster on a book basis than on a tax basis (larger depreciation expenses on a book basis -> lower EBT -> lower taxes. Tax basis is what you actually owe the government so the difference between your book and tax liability is the deferred tax liability. It is unwound each time you pay tax expense by debiting deferred tax liability and tax expense and crediting cash).
A 338h election is when you have a stock transaction that is treated like an asset purchase (IE the assets/liabilities are written up on BOTH a book and tax basis).
Thanks, and I'll run through the series shortly. Does that mean the DTL will never be unwound until the asset/company is sold by the acquirer? Unlike usual book/tax discrepancies where it's the pace of the depreciation that differs (one is faster in early years and slower in later years), it seems that we also have a total gross depreciable amount discrepancy here. If an asset booked at 40 is bought at 50 for step up, how is that extra 10 a temporary difference if the asset is never sold?
No the DTL unwinds over the years. In your example a 10m DTL is created
For example after year one it could look like
Debit: DTL 2m Tax expense: 13m
Credit: Cash: 15m
Balance of DTL after one year: 8m
and so on
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