How does the tax amortisation benefit affect intangible asset fair value?

Full Explanation

When an intangible asset is acquired in a business combination, the acquirer can often amortise it for tax purposes, generating tax deductions that reduce future tax payments. A hypothetical market participant would factor these tax savings into their willingness to pay, so fair value under IFRS 3 and ASC 805 should include the TAB. The TAB is calculated as a gross-up factor applied to the pre-TAB value of the intangible. The formula is: TAB factor = 1 / (1 - (tax rate x present value annuity factor / (1 + present value annuity factor x tax rate))). In simpler terms, if a pre-TAB intangible is worth £10M, and the TAB factor is 1.15, the post-TAB fair value is £11.5M. The TAB factor depends on the statutory tax rate, the useful life for tax amortisation, and the discount rate. Not all intangibles qualify for tax amortisation in all jurisdictions — goodwill is typically not tax-deductible in the UK, while customer relationships and technology generally are. In the US, Section 197 intangibles are amortised over 15 years for tax purposes regardless of their economic useful life. The TAB can add 10-20% to intangible asset values, making it a material component of the PPA. Omitting the TAB understates intangible values and overstates goodwill.

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