I've seen the attached example of calculating Goodwill in an M&A transaction. However, I don't completely understand:
(1) why is the DTL added back to arrive at goodwill? (2) why does the DTL only equal the write-up applied to the intangible assets?
Can somebody help?
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Good Will = offer value - net identifiable asset - asset (tangible and intangible) write up + deferred tax liability created as a result of those write up
Because it is NET assets (so assets - liabilities). The write-up creates a tax liability.
I dont' really get it. We take the amount of what the purchase price exceeds the target's ned-identifiable assets and write-up the target's assets to their fair-market value. So far so good. But why do we add the DTL?
Not sure if this answers your questions, but adding back DTL is the only way for A = L + E to balance.
In your picture, the first shaded bar for 'equity purchase price', is going in to equity, on the right side of the equation. The three yellow bars are all going into assets, on the left side. Now, the amount of goodwill created should simply be the difference, in order to balance the equation. However, the write-up created a DTL on the right side of the equation, thereby reducing the discrepancy between Assets and Liabilities + Equity. This, in turn, decreases the plug-value for goodwill.
Hope this at least answers your first question
Yes it does, thank you.
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