ACCA Strategic Business Reporting (SBR) Practice Exam

Deferred tax is not recognized on the initial recognition of goodwill due to specific guidance provided in accounting standards, particularly under International Financial Reporting Standards (IFRS). When goodwill is recognized, it typically arises from a business combination where the acquirer pays more than the fair value of the identifiable net assets acquired. Recognizing deferred tax in this case would contradict the principle of valuing the transaction at fair value since the measurement of goodwill does not involve recognizing any related tax consequences at the initial point of the transaction. Therefore, accounting standards specifically exempt the initial recognition of goodwill from deferred tax liability or asset recognition.

In comparison, the other scenarios mentioned relate to situations where deferred tax may need to be recognized. In the case of asset revaluation, although it may not always lead to immediate recognition of a deferred tax asset or liability, the potential for temporary differences arising from future gains does warrant consideration of deferred tax implications. Similarly, in a business combination transaction beyond the initial recognition of goodwill, other elements such as acquired assets and liabilities can lead to temporary differences that necessitate recognizing deferred tax. Lastly, temporary differences by definition refer to differences between the carrying amount of an asset or liability and its tax base, which typically require the recognition of deferred tax to reflect the timing of tax