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题目：The Research on Accounting for Income Tax of Mergers and Acquisitions

学院国际学院

学生姓名学号

专业国际会计届别 10届

指导教师职称

二O一O 年五月

江西财经大学普通本科毕业论文

普通本科生毕业论文（设计）诚信承诺书

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江西财经大学普通本科毕业论文

Abstract

M&A stand for mergers and acquisitions. Mergers refer to the situation that the assets and liabilities of one company are transferred to the other company and the first company is dissolved. However, for acquisitions, both companies keep their legal status and one company acquires the control of the other company. With the development of the society, the transactions between companies become frequent and the scale of economy gets larger. Moreover, we find M&A become very common in international world. China, as a large developing country of WTO, also has an increasing number of transactions about M&A in the past few years. In fact, large companies all around the world have seen a variety of benefits for the development of the enterprises brought by M&A. And at the same time the whole society is benefited from M&A due to the efficient allocation of resources. However, the rules and standards about M&A are not very mature since M&A are relatively new rising transactions and very complicated. Fortunately, the issuance of “The notification of the income tax problem of the business combination and division transactions by the State Administration of Taxation” (No.119［2000］of State Administration of Taxation ) make up the blank of tax law. But we are still challenged by accounting for income tax of M&A because of the differences between accounting standards and rules of tax law. In order to gain more knowledge about the problem, the essay first introduces the general methods of accounting for income tax. Then the paper discusses the relevant rules of tax law and accounting standards for M&A. Last but not least, the thesis talks about the accounting treatment under different types of business combination so as to throw light on the problem.

【Key Words】income tax, M&A, business combination, balance sheet liability method, deductible or taxable temporary differences, deferred tax assets or liabilities

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Acknowledgements

Four years ago, I was a girl who just graduated from high school and knew little about accounting even if I chose international accounting as my major. But now I am so glad to say that I am really into the accounting world. Thanks to four-year university education, I have been cultivated to be a college student of commercial sense and good professional knowledge. However, I am who I am because of the continuous help from great people.

First of all, I would like to deliver my sincere gratitude to Professor Jinfa Jiang, who once taught me intermediate accounting when I was a sophomore. At that time, I just stepped into the world of professional learning, his guidance and instruction let me have a good knowledge of accounting. Without his help, I hardly can finish the thesis on my own. I think his passion and profession will influence me in every aspects of my future life.

Moreover, I really appreciate all the teachers who once taught me in the past few years. They not only help me grasp a lot of professional knowledge but also offer me a variety of advice which will benefit me in my whole life.

Last but not least, I would like to express my deep appreciation to my family and my friends who always stand by me and support me on any condition. My family provided me with a lot of assistance when I was trying to accomplish my thesis. My friends offer me valuable advice when I have trouble in writing the thesis.

To all these people, my sincere thanks.

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江西财经大学普通本科毕业论文

Table of Contents

普通本科生毕业论文（设计）诚信承诺书 (i)

Abstract (ii)

Acknowledgements (iii)

Table of Contents (iv)

1. Introduction (1)

2. General methods of accounting for income tax (2)

2.1 Income statement liability vs. balance sheet liability method (2)

2.1.1 Income statement liability method (2)

2.1.2 Balance sheet liability method (3)

2.2 The adoption of balance sheet liability method (4)

2.2.1 The strengths of balance sheet liability method (4)

2.2.2 The application of balance sheet liability method (6)

3 Rules of tax law and accounting standards for M&A (7)

3.1 Taxable and tax-free M&A (7)

3.2 Accounting standards for M&A (8)

3.2.1 Business combination under common control (8)

3.2.2 Business combination under no common control (10)

3.2.3Comparison of two types of business combination (12)

4 Accounting treatment for income tax of M&A (14)

4.1 Mergers under common control (14)

4.2 Acquisitions under common control (16)

4.3 Mergers under no common control (18)

4.4 Acquisitions under no common control (19)

5. Conclusion and summary (20)

References (22)

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1. Introduction

M&A comprises of mergers and acquisitions, is sometimes also known as business combination. Merger refers to the portfolio of one or two more companies and only one company maintains the original legal status while the legal status of the other companies will no longer exist. In fact, most activities of M&A can be included in Mergers. Acquisition means that a company with cash, bonds or stocks buys all or part of shares or assets of another company in order to get control of the company. All the companies involved in the behavior of acquisition remain their legal status. Although M&A started relatively late in China, the past five years have seen sharp increase in the trade volume of M&A , which makes China become active in the M&A of all the Asia-Pacific countries. After becoming a member of WTO, the development of M&A in China is getting more mature and rational. M&A has undergone major changes in the pattern and aims1. The early patterns of M&A were primarily passive and the main goal of M&A was to eliminate inferior companies. We can easily find that active pattern of M&A is growing at a rapid rate in the recent years and the prime target is to initiatively seek business expansion. Many great benefits brought by M&A result in the growing number of M&A2. Actually, the behavior of M&A between companies not only enhances the development of the companies but also contributes to the progress of the society. For the company, they can acquire assets at lower prices and get important factors of production. Moreover, they can achieve a higher market share by expanding the scale of the company. In addition, they are able to reduce business risk by realizing diversification. For the whole society, M&A can promote the rational flow of social resources and optimize the allocation of resources so that they can be used effectively. Furthermore, it can improve the development of economy by adjusting the structures of economy and industry. Additionally, M&A can avoid violent social unrest since the unrest caused 1周兴挺，中国企业并购发展研究，特区经济，2007

2杜文昌，企业兼并中的财务会计问题，科技资讯，2006

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by mergers is far lower than bankruptcies. However, due to the complication of M&A and the imperfection of the relevant rules and standards, we find ourselves really puzzled in dealing with the accounting problems related to M&A. With the rapid increase in the development of M&A, the establishment of new rules and standards are essential to solve the emerging problems relevant to M&A. Among all the problems, how to deal with the income tax stands out. In June 2000, the State Administration of Taxation issued a file named “The notification of the income tax problem of the business combination and division transactions by the State Administration of Taxation” (No.119［2000］of State Administration of Taxation ). To some extent, the file filled in the blank of tax law and keep in line with the international rules of treatment on the income tax of M&A. However, due to the differences between the tax law and the new “Enterprise Accounting Standards” on the initial measurement of the combination cost, direct relevant expenses and subsequent measurement, we feel challenged in recognition and measurement of accounting as to this issue. It’s meaningful to obtain a better understanding in order to help us know how to handle the accounting problems about income tax resulted from M&A.

2. General methods of accounting for income tax

2.1 Income statement liability vs. balance sheet liability method

2.1.1 Income statement liability method

Income statement liability method is the analysis of different timing of recognition for revenues and expenses due to the differences between accounting standards and tax law, that the analysis of timing differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Accounting profit is net profit or loss for a period before deducting tax expense. Taxable profit is the profit for a period, determined in accordance with the rules established by the taxation authorities, upon which income

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taxes are payable. Timing differences analyze the differences between taxable profit and accounting profit from the perspective of income statement items and reflect the differences that appear in that period. Income statement liability method can only identify timing differences.

Timing differences emphasize on the influence on current tax caused by the origination and reversion of differences. Income statement liability method focuses on the past and present and can’t directly reflect the effects on the future. It places emphasis on matching revenues and expenses. Under income statement liability method, the items of income statement are recognized directly while items of balance sheet are recognized indirectly. In such situation, tax expense is calculated first, the formula is as follows: tax expense=accounting profit*tax rate. Then the deferred tax is calculated based on the differences between tax expense and current tax. Current tax is the amount of income taxes payable in respect of the taxable profit for a period.

2.1.2 Balance sheet liability method

Balance sheet liability method is the analysis of temporary differences, which are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. Temporary differences analyze the differences between taxable profit and accounting profit from the perspective of income statement items and reflect the differences that appear in that time point. Balance sheet liability method can not only recognize timing differences but also other temporary differences. Because all timing differences are temporary differences, but there are some temporary differences which are not timing differences.

Temporary differences emphasize on the influence on the ending balance of assets and liabilities and the content of the differences and we can directly calculate deferred tax assets and deferred tax liabilities. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:(a) deductible temporary

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differences;(b) the carry forward of unused tax losses; and(c) the carry forward of unused tax credits. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Balance sheet liability method focuses on present and future. Under balance sheet liability method, the items of balance sheet are recognized directly while the items of income statement are recognized indirectly. Deferred tax assets and deferred tax liabilities on balance sheet date are calculated first and then we calculate tax expenses. The formula is as follows: tax expense= current tax + (ending balance of deferred tax liabilities –beginning balance of deferred tax liabilities) – (ending balance of deferred tax assets- beginning balance of deferred tax liabilities).So the tax expense is the aggregate amount included in the determination of net profit or loss for the period in respect of current tax and deferred tax.

2.2 The adoption of balance sheet liability method

2.2.1 The strengths of balance sheet liability method

Compared to the income statement liability method, the balance sheet liability method better serves the needs of more relevant and reliable accounting information, which provides the following strengths:

1. Improve the relevance of accounting information

According to the balance sheet liability method, the deductible temporary differences and the taxable temporary differences would be recognized as deferred tax assets and deferred tax liabilities respectively. They are the essential items that comprise the balance sheet. Such accounting treatment can thoroughly reflect the inflow and outflow of cash in the future because of the temporary differences on the balance sheet date. Therefore, the information user can better judge the financial position and predict the future cash flow.

2. Provide more reliable and sufficient income tax accounting information

As mentioned above, the balance sheet liability method focuses on temporary

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differences, which includes all the timing differences and other temporary differences. Temporary differences arise in the following circumstances, which do not give rise to timing differences:

(a) Subsidiaries, associates or joint ventures have not distributed their entire profits to the parent or investor

(b) Assets are revalued and no equivalent adjustment is made for tax purposes; and

(c) The cost of a business combination that is an acquisition is allocated to the identifiable assets and liabilities acquired, by reference to their fair values but no equivalent adjustment is made for tax purposes.

Furthermore, there are some temporary differences which are not timing differences, for example those temporary differences that arise when:

(a) The non-monetary assets and liabilities of a foreign operation that is integral to the operations of the reporting entity are translated at historical exchange rates;

(b) Non-monetary assets and liabilities are restated under IAS 29, Financial Reporting in Hyperinflationary Economies; or

(c) The carrying amount of an asset or liability on initial recognition differs from its initial tax base.

Therefore, when we apply balance sheet liability method, we could acquire more sufficient and complete information.

3. Provide an easier and comprehensible way of accounting for income tax

Under income statement liability method, there is only one account which is “deferred income tax”. But under balance sheet liability method, we set two accounts based on the specific temporary differences. They are “deferred tax assets” and “deferred tax liabilities”. It’s more comprehensive for us to recognize and measure the deductible temporary differences and the taxable temporary differences by using two accounts.

4. Achieve the targets of tax law and accounting in an better way

The goal of the tax law is to assure the tax revenues while the aim of accounting is to provide relevant, reliable information to the users. It’s true that the differences can’t

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be avoided. Moreover, with the development of the economy, we can expect that there will be more temporary differences including timing differences and other temporary differences. However, using income statement liability method can’t handle other temporary differences. The adoption of balance sheet liability method can solve all the differences between accounting profit and taxable profit.

2.2.2 The application of balance sheet liability method

According to both “IAS 12 Income Taxes (revised 2000)” and “Accounting Standards for Enterprises No. 18 - Income Tax”, accounting for income tax should adopt the balance sheet liability method. Under balance sheet liability method, the key of accounting treatment is to determine the tax base of the assets and liabilities. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an enterprise when it recovers the carrying amount of the asset. The tax base of a liability is its carrying amount less any amount that will be deductible for tax purposes in respect of that liability in future periods. Once it’s decided, we can easily calculate the temporary differences by comparing the carrying amount of assets or liabilities to the tax base. By judging the influence on the future tax, temporary differences can be divided into taxable temporary differences and deductible temporary differences1:

1. When the carrying amount of assets is less than tax base or the carrying amount of liabilities is greater than tax base, the deductible temporary difference arises and shall be recognized as deferred tax assets.

2. When the carrying amount of assets is greater than tax base or the carrying amount of liabilities is less than tax base, the taxable temporary difference arises and shall be recognized as deferred tax liabilities.

1.注册会计师协会编，《会计》，中国财政经济出版社，2009

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3 Rules of tax law and accounting standards for M&A

3.1 Taxable and tax-free M&A

According to “The notification of the income tax problem of the business combination and division transactions by the State Administration of Taxation” (No.119［2000］of State Administration of Taxation ), the tax treatment of business combination will be divided into taxable and tax-free M&A.

1.Taxable M&A. Generally speaking, the combined party should be regarded as

transfer or dispose of all assets at fair value, calculate the gains from the sale of assets and pay income tax according to the tax law. When combining party accept the relevant assets from the combined party, the tax should be calculated based on the assessment of the cost.

2.Tax-free M&A. If non-equity payment ( cash, securities and other assets other

than combining party’s equity)of the purchase price paid to the combined party or its shareholders by the combining party is no higher than 20% of the face value of the equity payment, then the combining party should choose income tax treatment in accordance with the following provision:

The tax base of all assets accepted by the combing party which are from the combined party should be determined based on the original net book value of the combined party.

3.The income tax treatment rules about taxable and tax-free M&A can be concluded

as the following chart1:

1.肖丽、李冰锋、胡佳，论吸收合并所得税的会计处理，《湖北财经高等专科学校学报》第3期，2008

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In summary, under taxable M&A, the tax base should be based on the assessment costs of assets and profit or loss is recognized at the same time; under tax-free M&A, tax base should be based on the original net book value of the combined party and no profit or loss is recognized.

3.2 Accounting standards for M&A

3.2.1 Business combination under common control

Business combination under common control1refers to the situation that the parties involved in combination are subject to the same control by one or more parties before and after the combination and that control is not ultimately temporary. Generally, business combination under common control is the combination between enterprises in the same enterprise group. Business combination under common control usually includes two types: Mergers under common control

1.注册会计师协会编，《会计》，中国财政经济出版社，2009

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and acquisitions under common control.

The major features of business combination under common control could assist us in identify it: (1)From the perspective of the ultimate controlling party, the net assets it controls don’t change

before and after combination and should be measured as the original book value.

(2)Because related parties are involved in this kind of combination, the price of transaction is

usually not fair. The price agreed upon by the related parties could hardly be the base for accounting. If we adopt that price, it’s likely the value of assets is overestimated.

For business combination under common control, the combining party should obey the following rules to do related treatment:

(1)Measurement of the cost of business combination under common control. The assets and

liabilities acquired from the business combination by the combining party should be measured based on the book value of combined party on business combination date.

(2)Treatment for the expenses incurred during the business combination under common control.

Any relevant expenses incurred for the combination including the auditing cost, assessment cost, legal expenses, etc. should be measured as expenses for that accounting period by the combining party. The fees and commissions of the bonds issued or other debts assumed for the business combination should be recognized as the initial measurement of bonds or other debts. The fees and commissions incurred for the issuance of equity securities should be deducted from the premiums of the equity security. If the premium is not sufficient for deduction, the fees and commissions should be charged against the retained earnings.

(3) Treatment for the difference between the combining party’s interest in the book value of identifiable assets and liabilities acquired and the book value of the assets paid, debts assumed and equity securities issued

a)The combining party’s interest in the book value of identifiable assets and liabilities acquired

equals the book value of the assets paid, debts assumed and equity securities issued

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The difference between the fair value and the book value of the assets paid, debts assumed and equity securities issued should not be recorded as current profits or losses.

b)The combining party’s interest in the book value of identifiable assets and liabilities acquired

is higher than the book value of the assets paid, debts assumed and equity securities issued For mergers and acquisitions under common control, the excess of the combining party’s interest in the book value of identifiable assets and liabilities acquired over the book value of the assets paid, debts assumed and equity securities issued should credit “additional paid-in capital”. The difference between the fair value and the book value of the assets paid, debts assumed and equity securities issued should not be recorded as current profits or losses.

c)The combining party’s interest in the book value of identifiable assets and liabilities acquired

is less than the book value of the assets paid, debts assumed and equity securities issued

For mergers and acquisitions under common control, the excess of the book value of the assets paid, debts assumed and equity securities issued over the combining party’s interest in the book value of identifiable assets and liabilities acquired should debit “addition al paid-in capital”. If the balance of “addition al paid-in capital”is not sufficient for the excess, we should debit retained earnings. The difference under M&A between the fair value and the book value of the assets paid, debts assumed and equity securities issued should not be recorded as current profits or losses.

3.2.2 Business combination under no common control

Business combination under no common control1refers to the situation that the parties involved in combination are not subject to the same control by one or more parties before and after the combination.

Compared to business combination under common control, there are some major features that distinguish business combination under no common control:

(1)Measurement of the cost of business combination under no common control. The cost should

be measured by the fair value of the assets paid, the debts assumed and the equity securities issued. The specific rules are as follows:

1.注册会计师协会编，《会计》，中国财政经济出版社，2009

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a)Business combination achieved by one transaction. The cost is measured by the fair value on

purchase date of the assets paid, the debts assumed and the equity securities issued, which are offered to the combined party by the combining party in order to acquire the control of the combined party.

b)Business combination achieved by several transactions. The cost is measured by the fair

value on purchase date of the original equity held by the combining party plus the purchase price paid by combining party on purchase date.

(2) Treatment for the expenses incurred during the business combination under no common control. The direct relevant expenses incurred for the combination should be measured as the cost of business combination under no common control. The fees and commissions of the bonds issued or other debts assumed for the business combination should be recognized as the initial measurement of bonds or other debts. The fees and commissions incurred for the issuance of equity securities should be deducted from the premiums of the equity security. If the premium is not sufficient for deduction, the fees and commissions should be charged against the retained earnings.

(3) Treatment for the difference between the combining party’s interest in the fair value of identifiable assets and liabilities acquired and the cost of business combination under no common control. There are different ways for accounting treatment under three situations:

a)The combining party’s interest in the fair value of identifiable assets and liabilities acquired

equals the cost of business combination under no common control.

The difference between the fair value and the book value of the assets paid, debts assumed and equity securities issued should be recorded as current profits or losses.

b)The combining party’s interest in the fair value of identifiable assets and liabilities acquired

is higher than the cost of business combination under no common control.

For mergers under no common control, the excess of the cost of business combination over the combining party’s interest in the fair value of identifiable assets and liabilities acquired should be recorded as goodwill. For acquisitions under no common control, the excess of the cost of business combination over the combining party’s interest in the fair value of

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identifiable assets and liabilities acquired should not be recorded as goodwill. The difference under M&A between the fair value and the book value of the assets paid, debts assumed and equity securities issued should be recorded as current profits or losses.

c)The combining party’s interest in the fair value of identifiable assets and liabilities acquired

is less than the cost of business combination under no common control.

For mergers and acquisitions under no common control, the excess of the combining party’s interest in the fair value of identifiable assets and liabilities acquired over the cost of business combination should be recorded as current profits or losses. The difference under M&A between the fair value and the book value of the assets paid, debts assumed and equity securities issued should be recorded as current profits or losses.

3.2.3Comparison of two types of business combination

Before we apply the accounting treatment for income tax of M&A, it’s essential for us to distinguish the type of business combination. Because there’re two key elements for us to decide whether the differences are deductible temporary differences or taxable temporary differences, they are the tax base and carrying amount of assets and liabilities. Furthermore, only we identify the type of business combination can we expect to determine the right carrying amount of assets and liabilities. In other words, judging the type of business combination properly could help us find the correct accounting standards for accounting treatment. And we could find the differences between rules of tax law and accounting standards. Then we could apply the right accounting treatment for income tax of M&A. In order to identify the type of business combination properly, we should make a comparison of different types of business combination so as to discover the distinctions of accounting treatment for different types of business combination. By comparing five major aspects, we could properly determine the type of business combination. Five aspects of two types of business combination could be clearly viewed by using the following chart:

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4 Accounting treatment for income tax of M&A

4.1 Mergers under common control

According to both “IAS 12 Income Taxes (revised 2000)”and “Accounting Standards for Enterprises No. 18 - Income Tax”, accounting for income tax should adopt the balance sheet liability method. By adopting balance sheet liability method for accounting treatment for income tax, the difference between tax base and book value of the assets and liabilities should be regarded as temporary differences. As mentioned above, the accounting standards state that the cost of mergers under common control should be measured by the book value of assets and liabilities; any expenses incurred for mergers under common control should be recorded as the current profits or losses.“The notification of the income tax problem of the business combination and division transactions by the State Administration of Taxation” (No.119［2000］of State Administration of Taxation ) states:

1. If the non-equity payment is no higher than 20%, the transaction is classified as tax-free merger; the tax base of the assets and liabilities is based on the book value of combined party. Therefore, when the non-equity payment of the purchase price paid by combining party is no higher than 20%, the carrying amount and tax base of assets and liabilities are the same, no adjustment is needed.

2. If the non-equity payment is higher than 20%, the transaction is classified as taxable merger; the tax base of the assets and liabilities is based on the fair value of the assets and liabilities plus the direct relevant expenses, thus temporary differences appear. The adjustments of tax should be divided into two aspects, including fair value and direct relevant expenses:

(1) When the carrying amount of assets is less than tax base (fair value of the assets) or the carrying amount of liabilities is greater than tax base(fair value of the liabilities), the deductible temporary difference arises and shall be recognized as deferred tax assets. When the carrying amount of assets is greater than tax base (fair value of the assets) or the carrying amount of liabilities is less than tax base(fair value of the

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