Forum Archive Index - October 2000

[Brian Gale <brigale@i4free.co.nz>]

Hi John

Goodwill comes about in a takeover situation where the valuation of a
company is greater than just the tangible assets - stock, land buildings
etc. It is arrived at by negotiation without relation to any tangible
items, could be related to expected future earnings. It has an
intrinsic/intangible value and appears as such on the balance sheet
offset by the total amount paid for the company - owners equity. Tangible
assets depreciate in value and the IRD allow for this according to the
%age scales they set for various categories; so each year these assets
are written down with the amount deducted in the P/L statement offset by
a reduction of the original value of the items. The IRD scales relate to
the expected live of the asset and are deductible for taxation purposes.
In effect it is providing for the asset to be replaced when its useful
life is over.

As goodwill is intangible without a life-span i.e. it doesn't depreciate
in value, it is not allowable as a tax deduction if it is written off. To
be written off - as the goodwill is reduced - the opposite entry is a
reduction in the owners equity, which would include earnings after the
first year of operation (tax paid)  In effect the earnings
are balancing off the amount already paid as goodwill so it might be
several years before the owners start to win on their investment.

Hope it makes sense

Regards
Brian


 
At 13:33 10-10-00 +1300, you wrote:
> Hi Brian,
> I must admit to having given an opinion on this off the top of my head.
> I
> said I believed goodwill [or more correctly the amortisation of it was]
> tax
> deductible. Please see my earlier posting. Perhaps I'm wrong here but
> isn't
> it like other intangible or fixed assets that are amortisised or
> depreciated
> over their useful life with this depreciation or amortisation being a
> tax
> deductible expense in the years it occurs?
> Cheers,
> John