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Hi Mike
please could you explain to me why a deferred tax liability is added on to goowill when working out goodwill for cash flows? many thanks.
Jocatt dec 2010
Because in calculating the goodwill and recognising it as an asset, the deferred tax has been separately accounted for?
I should be more specific-
Workings
(i) Tigret goodwill
$m
1 December 2009 – consideration 30
Fair value of equity interest held before business combination 5
–––––
Fair value of consideration 35
Fair value of non-controlling interest 20
–––––
55
Identifiable net assets (45)
Deferred tax (45 – 40) x 30% 1·5
–––––
Goodwill 11·5
–––––
Therefore goodwill is impaired by $68m plus $11·5m minus $48m i.e. $31·5mYou lost me when you got to “goodwill is impaired by $68m plus $11·5m minus $48m i.e. $31·5m” Where’s the $68 million from? Am I being stupid here? That looks like a deferred tax asset of 11.5, not a liability
sorry about that. so when you get the answer of 11.5 i put it into this working:
opening balance is 68
plus the goodwill of 11
therefore there is an impairment of 31.5 to get to the 48
closing balance 48
im confused because im sure the $1.5 million is a deferred tax liability
in the question it says the fair value of the net assets of tigret was $45 million, and the tax base was $40 million with a tax rate of 30%. i thought if the assets are more than the tax base, then that creates a liability.
thanks.
i have found the problem now! everything is ok! it was just the way graham holt worded the answer was slightly confusing i.e didnt show that you take off the 1.5 million of deferred tax liability from the net assets.
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