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Concern about deferred tax liability for goodwill


I found a concern with regard to deferred tax of goodwill.

IAS 12 prohibits the recognition of the resulting deferred tax liability on the initial recognition of goodwill. The underlying rationale for this exception is that, if a deferred tax liability were set up in respect of the goodwill at the time of the business combination, this would decrease the total for the net assets recognized. Because goodwill is a residual, this would further increase goodwill and the increase would also need to be tax-effected.  [IAS 12:21 & 21A]

I think a lot but just in vain, I don't understand why they said that "the goodwill is a residual, and then would increase  goodwill and the increase would also to be tax-effected". Thus, this mean the entry is will be :
Dr Goodwill / Cr Deferred tax liability  => as my understanding, when there are deferred tax liability, we will record entry: Dr Deferred tax expense / Cr Cr Deferred tax liability.
=> Pls help me explain for this.

Regards.

asked May 14, 2014 in IAS 12 - Income Taxes by anonymous

1 Answer

0 votes
Well, goodwill is a residual value between the consideration you paid in the acquisition and the fair value of identifiable net asset of the acquiree's company. In your first entry, goodwill will not bring the DTL, because DTL actually come from the difference between the fair value changes of the net assets. Second, although goodwill is shown on the deferred tax worksheet, it will be excluded in the computation of DTL. In addition, your second entry is correct to record the deferred tax.
answered Aug 19 by Janeli


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