why do we add the DTL in calculating goodwill

Flomm's picture
Rank: Orangutan | 293

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?

Comments (7)

Aug 14, 2019

Good Will = offer value - net identifiable asset - asset (tangible and intangible) write up + deferred tax liability created as a result of those write up

Aug 14, 2019
  1. DTL is created to capture the difference between tax and book accounting that resulted from the write up
  2. DTL is created from writeups for both tangible and intangible assets, using acquisition tax rate x sum(writeups
Aug 15, 2019

Because it is NET assets (so assets - liabilities). The write-up creates a tax liability.

Aug 20, 2019

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?

Aug 20, 2019

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

    • 1
Aug 20, 2019

Yes it does, thank you.

Aug 20, 2019
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