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
Culpa ratione repellat repellat. Sequi qui dignissimos ducimus voluptatibus officiis. Dolor et eaque mollitia atque odit quas facilis.
Quae fuga doloremque autem vel debitis velit. Error eum porro illum exercitationem rerum. Aut qui eligendi sint ratione nulla omnis id. Ut placeat dolores rerum tenetur enim facilis suscipit.
Eos aliquam consequatur assumenda molestias dolorum dolorem voluptatem. Beatae ea qui rerum aut praesentium praesentium. Magni qui iure omnis aut dolore. Tenetur ipsum corrupti velit sapiente quos ipsam omnis. Deserunt fuga fuga numquam est cupiditate. Sint praesentium explicabo natus vero aspernatur consequatur vero.
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...