United States

Business combinations: Allocation of amounts to foreign subsidiaries

FINANCIAL REPORTING INSIGHTS  | 

When an entity enters into a business combination affecting foreign subsidiaries, U.S. generally accepted accounting principles (GAAP) require the entity to allocate all applicable goodwill and related intangible assets to those foreign subsidiaries. This is particularly important when the subsidiaries have different functional currencies and (or) are in situations where there are significant deferred income taxes on the opening balance sheet with different jurisdictional effective tax rates. The allocation of applicable goodwill and related intangible assets to foreign subsidiaries is required regardless of whether the entity has elected the private-company goodwill accounting alternative because such allocation could affect the amount of initial goodwill that is recorded, as well as the entity’s future foreign currency translation gains (or losses), amortization and (or) impairment charges. When a foreign subsidiary is affected by an acquisition, the entity should discuss with its valuation specialist the need to allocate some portion of goodwill and intangible assets recorded in the accounting for the business combination to the foreign subsidiary irrespective of whether or not the entity elects to push down the allocated amounts to the foreign subsidiary’s local books. Often an allocation also is required for income tax purposes, which should be discussed with the entity’s tax specialist. If the allocation methods used for U.S. GAAP and tax purposes are different, the entity’s deferred income taxes will be affected.

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