Deferred Tax Liabilities In Acquisitions

This question tests your understanding of how purchase accounting changes the balance sheet and why book and tax accounting can diverge after a deal closes. In an acquisition, interviewers want you to recognize that assets may be stepped up to fair value for financial reporting while the tax basis does not change in the same way, especially in a stock purchase. That creates temporary differences in future depreciation or other deductions, which is why deferred tax liabilities are recorded. Questions like this matter in accretion dilution and purchase accounting because DTLs affect the sources and uses, the pro forma balance sheet, and ultimately the valuation impact of the transaction.