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Why is a deferred tax liability created for Goodwill?

Most companies use straight-line depreciation for financial statements and accelerated depreciation for income tax returns. So this means they have more taxes in the P&L statement as compared to the actual taxes paid. So they created a deferred tax liability for this because eventually they do have to pay this tax. When they do pay this extra tax, at that time, the DTL in the books will progressively reduce. This I fully understand.

However, I don’t understand creation of deferred tax liability for goodwill. Goodwill can be amortized in tax returns so companies pay less tax. Goodwill cannot be amortized in accounting statements. So they will have more taxes in the P&L statement as compared to actual taxes paid. However, these aren’t taxes which will need to get paid later (unlike the accelerated depreciation case). So what is the basis for creating the Deferred Tax Liability? When will liability be decreased progressively? 

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Goodwill is not amortized.

It is tested annually for impairment.

Simplify the complicated side; don't complify the simplicated side.

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S2000magician wrote:

Goodwill is not amortized.

It is tested annually for impairment.

I did say that in my question - that Goodwill is not amortized in the accounting statements. And it doesn’t answer my question.

TheGlugGlug wrote:
S2000magician wrote:
Goodwill is not amortized.

It is tested annually for impairment.

I did say that in my question - that Goodwill is not amortized in the accounting statements. And it doesn’t answer my question.

It wasn’t intended to answer your question.

I did miss that you mentioned that it isn’t amortized on the financial statements; sorry about that.

You’re talking about permanent differences between tax returns and income statements; permanent differences don’t give rise to deferred tax assets or deferred tax liabilities.

Simplify the complicated side; don't complify the simplicated side.

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S2000magician wrote:

You’re talking about permanent differences between tax returns and income statements; permanent differences don’t give rise to deferred tax assets or deferred tax liabilities.

I also though tthat amortization should not give rise to DTL but McKinsey’s book indicates otherwise. Hence the question 

From McKinsey’s Valuation, 6th Edition  Chapeter “REORGANIZING THE ACCOUNTING STATEMENTS: IN PRACTICE” Page 179
 

To evaluate goodwill and acquired intangibles properly, you need to make two adjustments. First, subtract deferred tax liabilities related to the amortization of acquired intangibles. Why? When amortization is not tax deductible, the accountants create a deferred tax liability at the time of the acquisition that is drawn down over the amortization period (since reported taxes will be lower than actual taxes). To counterbalance the liability, acquired intangibles are artificially increased by a corresponding amount, even though no cash was laid out.

They’re talking about amortizing acquired intangibles (and DTLs that arise from them), not goodwill.

Simplify the complicated side; don't complify the simplicated side.

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http://financialexamhelp123.com/

While purchase price allocation, after allocating purchase price to book values of assets, excess purchase price is first allocated to any asset write ups to fair market values for book purposes only but not for the tax purposes. Hence incremental depreciation arises for accounting purpose results in lower NI and lower taxes while no change in NI and taxes for tax purposes. Because of this tax difference DTL is created (tax rate x change in asset values to market values). After which excess purchase price is then allocated to newly created DTL before arriving to Goodwill figure. Note that since accounting depreciation is greater in such a case, DTL will be negative and in fact increases the Goodwill amount created in the acquisition transaction! 

mskhan91 wrote:

While purchase price allocation, after allocating purchase price to book values of assets, excess purchase price is first allocated to any asset write ups to fair market values for book purposes only but not for the tax purposes. Hence incremental depreciation arises for accounting purpose results in lower NI and lower taxes while no change in NI and taxes for tax purposes. Because of this tax difference DTL is created (tax rate x change in asset values to market values). After which excess purchase price is then allocated to newly created DTL before arriving to Goodwill figure. Note that since accounting depreciation is greater in such a case, DTL will be negative and in fact increases the Goodwill amount created in the acquisition transaction! 

Got it. Thank you.