Chapter 3: Adjustments and Fair-Value Uplifts

3.1 Remeasurement of PPE and Intangibles

Under IFRS 3 (Business Combinations) and IAS 16 (PPE) or IAS 38 (Intangibles), on acquisition you remeasure the acquiree’s property, plant & equipment and identifiable intangible assets to fair value at the acquisition date.

• Recognition: All identifiable assets and liabilities assumed are recorded at fair value, even if previously carried at cost.
• Measurement approaches: Market-based, income-based (discounted cash flows), or cost-based techniques.
• Result: A “fair-value uplift” over the acquiree’s carrying amount, which enters consolidated opening balances.

3.2 Depreciation on Fair-Value Uplifts

Once the uplift is recorded, you depreciate (or amortize) the incremental amount over the asset’s remaining useful life:

Extra depreciation (p.a.) = Fair-value uplift ÷ Remaining life

Expense treatment: Recognized in profit or loss alongside depreciation on the original carrying amount.

Dr Depreciation expense       XX,XXX  
  Cr Accumulated depreciation     XX,XXX  

3.3 Deferred Tax on Revaluations (IAS 12)

Fair-value uplifts create temporary differences between an asset’s tax base (often its original carrying amount) and its new carrying amount. You must recognize a deferred tax liability (DTL) on that difference at the enacted tax rate:

DTL on uplift = Uplift amount × Tax rate

Subsequent movements: Each year you unwind part of that DTL by recognizing deferred tax expense equal to the extra depreciation × tax rate.

Dr Deferred tax expense       YY,YYY  
  Cr Deferred tax liability       YY,YYY  

3.4 Worked Example & Journal Entries

Scenario: On acquisition, Entity A records a \$400,000 uplift on acquired machinery with 10 years of remaining life. Enacted tax rate = 25%.

1. Calculate extra depreciation: 400,000 ÷ 10 = \$40,000 per year
2. Compute deferred tax liability: 400,000 × 25% = \$100,000
3. Annual deferred tax charge: 40,000 × 25% = \$10,000

Year-end journal (each of the next 10 years):

Dr Depreciation expense           40,000  
  Cr Accumulated depreciation         40,000  

Dr Deferred tax expense           10,000  
  Cr Deferred tax liability           10,000  

3.5 Practice Problems

1. Problem 1: An entity acquires a building at a \$600,000 uplift with 20 years remaining life. Tax rate = 30%. Calculate the extra annual depreciation and related deferred tax liability at acquisition and for the first year.
2. Problem 2: On Day 1 the deferred tax liability for an asset uplift is \$150,000. If the extra depreciation for Year 1 is \$50,000, what deferred tax expense do you record, and what is the closing DTL balance?

3.6 Strategic Approach: Adjustments and Fair-Value Uplifts

Use this disciplined process to capture all fair-value remeasurements, related depreciation and deferred tax on acquisition-date uplifts:

1. Identify Remeasured Items
   Determine which acquired assets and liabilities must be measured at fair value under IFRS 3:
   • Property, plant & equipment (IAS 16)
   • Intangible assets (IAS 38)
   • Provisions and contingent liabilities (IAS 37)
2. Measure Fair-Value Uplift
   For each item, compute: Uplift = Fair value at acquisition – Carrying amount before acquisition Use market, income or cost valuation techniques per IFRS 13.
3. Recognise Uplift & Deferred Tax
   On acquisition date journal: Dr Asset (PPE/intangible) Uplift Cr Deferred tax liability Uplift × tax rate
4. Determine Remaining Useful Life
   Assess the remaining life of each asset (years or units of production) to amortize the uplift.
5. Compute Extra Depreciation / Amortisation
   Extra depreciation per annum = Uplift Remaining life
6. Calculate Deferred Tax Movement
   Deferred tax expense = Extra depreciation per annum × Tax rate
7. Post-acquisition Journal Entries
   At each period-end: Dr Depreciation expense [Extra depreciation] Cr Accumulated depreciation [Extra depreciation] Dr Deferred tax expense [Deferred tax movement] Cr Deferred tax liability [Deferred tax movement]
8. Attach to Consolidation Worksheet
   Record uplift, depreciation and DTL entries in the consolidation column, ensuring standalone records remain unchanged.
9. Disclose Assumptions & Judgments
   In the notes to the consolidated financial statements, describe:
   • Valuation methods and key inputs (e.g., discount rates, market comparables)
   • Useful lives and depreciation methods
   • Tax rate applied to temporary differences
10. Review & Reconcile
    Verify that:
    • Uplift balances roll forward correctly (opening uplift – cumulative extra depreciation)
    • Deferred tax liability matches expected closing balance
    • All journals are posted consistently each period