Goodwill exception and tax-deductible goodwill

Learning objectives

• Explain why no deferred tax liability is recognised on the initial recognition of goodwill (a residual amount).L2
• Determine the deferred tax on tax-deductible goodwill after initial recognition (para. 21B) and on goodwill whose tax base exceeds its carrying amount (para. 32A).L3

Normative references

• IAS 12 §15A deferred tax liability is recognised for all taxable temporary differences, except to the extent that it arises from (a) the initial recognition of goodwill or (b) the initial recognition of an asset or liability in a transaction that is not a business combination, that at the time of the transaction affects neither accounting profit nor taxable profit (tax loss) and that does not give rise to equal taxable and deductible temporary differences (condition (b)(iii) added in 2021).
• IAS 12 §18Temporary differences also arise when: (a) the identifiable assets acquired and liabilities assumed in a business combination are recognised at fair value (IFRS 3) with no equivalent tax adjustment (para. 19); (b) assets are revalued with no equivalent tax adjustment (para. 20); (c) goodwill arises in a business combination (para. 21); (d) the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example for a non-taxable grant related to an asset (paras. 22 and 33); (e) the carrying amount of investments in subsidiaries, branches, associates or joint arrangements comes to differ from their tax base (paras. 38 to 45). Exchange differences on non-monetary items are dealt with in para. 41.
• IAS 12 §21Many taxation authorities do not allow goodwill to be deducted, in which case its tax base is nil: the difference with its carrying amount is a taxable temporary difference, but the standard does not permit recognition of the resulting deferred tax liability, because goodwill is measured as a residual amount that the liability would increase.
• IAS 12 §21ASubsequent reductions in a deferred tax liability that is unrecognised because it arises from the initial recognition of goodwill are also regarded as arising from that initial recognition and are therefore not recognised.
• IAS 12 §21BDeferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognised to the extent that they do not arise from the initial recognition of goodwill.
• IAS 12 §32AIf the carrying amount of goodwill arising in a business combination is less than its tax base, the difference gives rise to a deferred tax asset, recognised as part of the accounting for the business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• Where goodwill arising in a business combination is not tax deductible, the entity recognises a deferred tax liability on the difference between its carrying amount and its nil tax base from initial recognition.L2
• In 20X6, Calvoria writes down goodwill that is not tax deductible and whose deferred tax liability was not recognised initially. The resulting decrease in the taxable difference gives rise to no deferred tax income.L2
• The goodwill exception prohibits any deferred tax liability relating to goodwill, including for a taxable difference that arises after the initial recognition of tax-deductible goodwill.L2
• Why does the standard prohibit recognising the deferred tax liability arising from the initial recognition of goodwill that is not tax deductible?L2
• Dorneval acquires a business, giving rise to goodwill of 420,000 that the tax law does not allow to be deducted. Which analysis is correct at the acquisition date?L2
• In a business combination, the carrying amount of goodwill is lower than its tax base. What does the standard require?L2
• Which of these statements about deferred tax relating to goodwill are correct?L3
• In Estravia's consolidated financial statements at 31 December 20X5, which situations give rise to the recognition of deferred tax?L3
• To determine the deferred tax relating to a subsidiary's goodwill at the reporting date, which information is needed?L3
• On 1 January 20X4, Galdrix recognised goodwill of {goodwill_carrying}, whose tax base was equal to that amount. The tax law (case data) allows it to be deducted at {annual_deduction} a year; at 31 December 20X5, {years_deducted} years have been deducted and the carrying amount of goodwill is unchanged. Tax rate: {tax_rate}%. Compute the difference and the deferred tax at the reporting date.L3
• Helvora group acquired a logistics company {years_deducted} years ago; the goodwill of {goodwill_carrying} was then equal to its tax base. Since then, the tax authority has allowed a deduction of {annual_deduction} per year (tax data); no impairment has been recognised. The expected tax rate is {tax_rate}%. Determine the temporary difference and the deferred tax at the reporting date.L3
• On acquiring a business, Isbrand recognises goodwill of {goodwill_carrying}; under the tax law (case data), its tax base is {goodwill_tax_base}. Sufficient taxable profit is probable. Tax rate: {tax_rate}%. Compute the difference and the deferred tax asset.L3
• Lumivar acquires a network of veterinary clinics and recognises goodwill of {goodwill_carrying}; its tax base is {goodwill_tax_base} (tax data). The forecasts used (case assumptions) make it probable that only {usable_amount} of the difference will be used. Tax rate: {tax_rate}%. Compute the difference and the deferred tax asset to be recognised in the combination.L3
• In the business combination carried out by Marquelle, goodwill computed before deferred tax amounts to 300,000 and is not tax deductible. The accountant recognised a deferred tax liability of 75,000 (25% rate) and increased goodwill to 375,000. Where is the error?L3
• Norbrey has held tax-deductible goodwill of 500,000 since 20X2; its tax base, originally equal to its carrying amount, has fallen to 300,000 at 31 December 20X5 as a result of tax amortisation. The goodwill is neither amortised nor impaired in the accounts. The controller recognised no deferred tax, citing the goodwill exception. Where is the error?L3
• Pellanor writes down by 120,000 goodwill that is not tax deductible (nil tax base since the outset). The accountant records deferred tax income of 30,000 (25% rate) on the grounds that the taxable difference has decreased. Where is the error?L3
• Hastrane, whose temporary differences all arise from items in profit or loss, has taxable differences of {opening_taxable} at the start of the year and {closing_taxable} at the reporting date, and deductible differences of {opening_deductible} and {closing_deductible}. The rate, unchanged, is {rate}%; the deferred tax assets are recoverable. Compute the deferred tax expense for the year.L3
• In the acquirer's consolidated financial statements, what is the effect of recognising the deferred tax liabilities arising from the fair value adjustments of a business combination?L3