Deferred tax asset creation during non tax-deductible goodwill impairment
DTAs/DTLs always mess with my head a little and I'm trying to understand how they factor in during the recognition of goodwill impairment when it is not tax-deductible.
Let's say a company impairs goodwill by $100. This will reduce pre-tax income by $100 and thus reduce net income by $80 assuming a 20% tax rate. Thus, from the I/S it appears we're paying $20 less in tax than actual IRS tax accounting would show.
So, on the CFS, it makes sense to me that we would add back the full $100 for the impairment as it is a non-cash expense, and subtract $20 for the cash taxes not reflected by the IS, and therefore with net income down 80 to begin with, there's no net change in cash.
So now turning to the balance sheet, cash is unchanged, goodwill is down $100, and net income is down $80. According to BIWS guides, this is balanced out by the creation of a $20 deferred tax asset. My question is - why is this asset created? What does it actually mean? Does it actually represent some sort of material cash tax savings in the future? Because in my mind, our cash taxes aren't changing, they're just going to be higher than book taxes for this one year and then after that everything is the same since I'm assuming goodwill isn't amortized.
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