How Is Goodwill Taxed When Selling A Business – The calculation of the fair value of goodwill is derecognised. Instead, companies will record an impairment charge based on the excess of the reporting unit’s goodwill over its fair value. This guidance simplifies accounting compared to previous GAAP. This article provides an overview of specific income tax issues related to the valuation of goodwill impairment and the financial impact of goodwill under the new guidance.
Defines goodwill as “an element representing future economic benefits from other assets acquired in a business combination that are not individually recognized and separately recognized.” In other words, goodwill is the excess amount that the acquirer would be willing to pay over the fair value of the reporting unit acquired from the perspective of a reasonable market participant – that is, the value received if reported. Trading between unit market participants was in good order. After goodwill is recorded as part of a business combination, the entity tests goodwill at least annually at the reporting unit level for any impairment.
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Under current guidance, companies may choose to evaluate any impairment based on qualitative factors first (Step 0). This option allows the entity to first evaluate these factors to determine that the fair value of the reporting unit is more likely than not to be an intangible of the subsidiary.
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June 2014.) If the company fails this test or decides to skip this step, it should proceed with the following two-step quantitative assessment of goodwill impairment.
First, the company compares the fair value of the reporting unit to its carrying amount (step 1). If the fair value is lower, the company must reduce any goodwill impairment charge by comparing the implied fair value of the goodwill to its carrying amount (step 2). Goodwill may be impaired if and only if the fair value of the goodwill is less than its carrying amount. An impairment loss reduces recorded goodwill and is irreversible.
Current guidance requires companies to calculate the fair value of all assets (including any unrecognized intangible assets) and liabilities of the reporting unit in Step 2 and deduct the previously calculated fair value of the reporting unit. The fair value of the contract needs to be calculated. Step 1. This process makes any goodwill impairment analysis expensive and complex. However, private companies may elect to amortize goodwill acquired in a business combination on a straight-line basis over 10 years, or if the entity demonstrates that another useful life is more appropriate and that – goodwill may choose to use one of the impairment tests (ASC 350). -20-35-63). Therefore, the new guidelines cannot be applied to private companies. (For additional information, see Lange, Fornaro, and Buttermilch, “A New Era for Private Company Accounting Standards, Shifting to Long-Term Good Practices.”
The FASB issued ASU 2017-04 in response to stakeholder feedback in 2014, when it provided an alternative accounting method that allowed private companies to reduce goodwill and a simplified one-step impairment test (ASU 2014-02). Allowed to use.
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Early adoption is permitted for interim or annual goodwill impairment tests performed on test dates after January 1, 2017. Due to the complexity of the current guidance, many companies may consider early adoption of the new guidance.
Under ASU 2017-04, companies must report goodwill impairment charges if the carrying amount of a reporting unit exceeds its fair value. Liquidation losses are based on the difference and are limited to the amount of goodwill allocated to the unit. Therefore, the new guidance eliminates the Step 2 analysis of the current goodwill impairment test. Companies continue to have the opportunity to make a qualitative assessment of goodwill impairment. However, if a company fails to make a qualitative assessment of its goodwill, it must proceed with the quantitative impairment test (ASC 350-20-35-3A).
Goodwill impairment charges under the new guidance may differ from current guidance because the unit difference (the unit carrying amount less the unit cost) always offsets the goodwill difference (the goodwill unit carrying amount). less than the price). ) Therefore, if the unit’s variance under the new guidance is higher or lower than the goodwill variance, it will replace the goodwill variance, which may result in a higher or lower goodwill impairment charge. In addition, some companies may not recognize any impairment under current guidance when they fail Step 1 under the new guidance, resulting in a reporting unit’s carrying value exceeding its fair value whenever If it exceeds then there is some impairment of goodwill. Exhibit 1 describes the options for goodwill impairments in various situations.
If companies test both goodwill and long-lived assets (held and used) due to an initial event, they must follow a specific procedure in their impairment test. Before testing goodwill for impairment, companies should first test other assets (eg, accounts receivable, inventory) and indefinite-lived intangible assets, then long-lived assets (including long-lived long-lived intangible assets) and finally goodwill. They must report the damage from each test before proceeding to the next test (ASC 350-20-35-31).
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The new guidance may result in goodwill impairment charges that were not reported under previous GAAP. When companies recognize goodwill impairment charges, they may need to assess the impairment of other assets based on underlying events.
Several FASB board members opposed issuing the new standard, saying it could lead to accounting results that do not reflect relevant economic conditions and lead to an overstatement or rejection of the one-step model. can become The weakness of friendship. . For example, in a rising interest rate environment, the fair value of reporting units with significant financial assets may fall below their carrying amounts. The new standard also mandates an impairment of goodwill in cases where the decline in the fair value of the reporting unit is due to a decline in the fair value of assets carried under amortization expense rather than an impairment of goodwill. To address the potential for further goodwill impairment, the dissenting panelists suggested that entities should have the option to opt for a two-step approach.
The single-step approach may also lead to a reduction in goodwill impairment if the liability’s fair value is less than its carrying amount, for example, because of an impairment of its goodwill. In this case, the entity is not required and has no incentive to record any impairment charges for its goodwill.
Finally, the new standard provides an incentive for companies with zero or negative net assets to proceed immediately to the first step of the goodwill impairment test to avoid reporting a goodwill impairment.
The income tax consequences of business combinations follow one of three patterns (see Exhibit 3). In a taxable transaction, the recipient receives a tax basis based on the fair value of the real property acquired. In a tax-free transaction, the acquirer takes the capitalization basis in the real estate but the fair value basis in any inventory acquired. In a tax-free transfer, the recipient takes a capitalized basis in both the property and any stock received. The tax treatment of an acquisition will directly or indirectly affect the purchase price and the amount of goodwill and its future impairment, as the acquirer may be willing to pay more for the acquisition in a taxable transaction. If any such transaction can give you action. – Based on tax on acquired property. Additionally, the structure of the acquisition may dictate whether the acquirer can take advantage of existing tax attributes (eg, tax credit carryforwards and net operating losses).
Under current guidance, Step 2 generally compares whether the transaction is taxable or nontaxable because, by definition, the amount of goodwill must remain the same whether the transaction is taxable or nontaxable. However, under the new guidance, when the acquisition is a taxable transaction, the goodwill impairment in Step 1 is generally reduced because the new guidance compares the total carrying value of the unit to its total fair value. Determines the error. Because the acquirer is willing to pay a higher selling price in a taxable transaction than in a taxable transaction, the total fair value in a taxable transaction is higher, resulting in a lower charge for losses. Additionally, companies may need to include deferred tax assets related to assets (in this case goodwill) and liabilities when determining the value of a reporting unit.
Under ASU 2017-04, companies recognize an impairment charge to the extent that the carrying value of a reporting unit exceeds its fair value (not exceeding the carrying value of goodwill). To determine the fair value of a unit, companies determine whether the hypothetical sale occurred in a taxable or nontaxable transaction, as discussed above. This decision may affect the fair value of the unit and thus any goodwill impairment charge.
In some jurisdictions, goodwill payments may be tax deductible. If a company or reporting unit operates in these jurisdictions, goodwill impairment charges may reduce its deferred tax liabilities (DTL) or increase its deferred tax assets (DTA). A decrease in DTL or an increase in DTA factors
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