DTL arising from goodwill in acquisitions
I don't understand the concept of goodwill creating DTL. So if firm A acquires firm B for a higher cost than its book value, and as such amortization of goodwill causes its income statement earnings to be lower than its tax earnings, shouldn't a deferred tax asset be created, not a deferred tax liability? After all, deferred tax liability occurs when you pay LESS tax than you are supposed to (actual taxes to be paid income statement taxes)? So why would having a lower earnings (and lower taxes) on the income statement create a DTL?
You may need to clarify the facts for me but it would appear that you are saying that the Company is amortizing goodwill for book purposes? This would imply they are a private company electing for the private company accounting treatment of goodwill.
If that is the case, the Company would amortizing goodwill and thus recognizing some amount of amortization expense, reducing net income. In the acquisition the Company may not have obtained tax basis in this goodwill and thus would not be able to deduct that amortization expense to get to taxable income. As a result, it would generate a DTL by taking the unamortized goodwill value times the effective tax rate.
Dtl means we are deferring the tax liability. That means we are not paying that tax now but in the future periods. But in case of initial recognition of goodwill our accounting income increases but in tax laws there is no provision regarding goodwill so the the taxable income will be less so the amt of tax we need to pay decreases but we cannot defer the remaining tax liability because even in future we are not going to pay the remaining as there is no such provision in income tax loss.. hope u understand
Ut deleniti facilis optio ratione iure. Est et commodi voluptatem velit ipsum quibusdam autem. Rerum sunt quasi vero quam et veritatis molestias. Et possimus eveniet culpa hic repellendus.
Quod non ut possimus consequatur sunt. Iusto quis quibusdam impedit et blanditiis quam. Culpa asperiores illum quia voluptatem aspernatur dolor.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...