Goodwill
This query is : Resolved
15 May 2014
An IT company has bought the Intellectual Property Rights and assets of another IT Company during F.Y 2010-11.
Difference in Value of assets and purchase consideration is booked as goodwill. So far no goodwill is written off.
As per AS 26, goodwill can be written off in 10yrs in books and u/s 32 of the IT Act, intangible asset can be depreciated @ 25%
Should it be written off in the immedietly succeeding years? or can we start amortisation from the F.Y 2013-14.
Difference in Value of assets and purchase consideration is booked as goodwill. So far no goodwill is written off.
As per AS 26, goodwill can be written off in 10yrs in books and u/s 32 of the IT Act, intangible asset can be depreciated @ 25%
Should it be written off in the immedietly succeeding years? or can we start amortisation from the F.Y 2013-14.
15 May 2014
it should have been written off from the year it was acquired till 10 years.
15 May 2014
Since it has not been written off, what is to be done now?
I dint see anywhere that it should be written of in immidietly succeeding 10 years..
I dint see anywhere that it should be written of in immidietly succeeding 10 years..
15 May 2014
Kindly provide tax impacts and book adjustments to write off goodwill from F.Y 2013-14....
26 July 2024
If goodwill acquired in the FY 2010-11 has not yet been amortized or depreciated, and you want to start writing it off or depreciating it from FY 2013-14, here's how you can handle it both from an accounting and tax perspective:
### **Accounting Treatment (AS 26)**
**1. **Amortization of Goodwill (AS 26)**:
- According to AS 26, goodwill should be amortized over a period not exceeding 10 years from the date of acquisition.
- **Amortization Period**: Since the goodwill was acquired in FY 11, the amortization period should start from FY 11 and end in FY 20.
**2. **Starting Amortization**:
- **Delayed Start**: If amortization has not yet started, you can start amortizing goodwill from FY 2013-14. You will need to adjust the previous years to reflect this change in accounting treatment.
**3. **Book Adjustments**:
- **Compute Amortization**: Calculate the annual amortization amount for the remaining period of the 10-year window.
- **Make Adjustments**: Record the amortization expense in the books for FY 2013-14 and subsequent years.
**Example**:
- **Goodwill Amount**: ₹100L
- **Remaining Amortization Period** (from FY 2013-14): 7 years
- **Annual Amortization**: ₹100L / 10 = ₹10L
**Journal Entries**:
For FY 2013-14:
\[ \text{Amortization Expense} \text{Dr.} ₹10L \]
\[ \text{Goodwill} \text{Cr.} ₹10L \]
### **Tax Treatment (Section 32 of the Income Tax Act, 1961)**
**1. **Depreciation on Intangible Assets**:
- As per Section 32 of the Income Tax Act, intangible assets, including goodwill, are eligible for depreciation at the rate of 25% per annum on the written down value.
**2. **Tax Implications**:
- **Depreciation Claim**: You should claim depreciation on goodwill starting from the year when the asset was first used. This would typically be FY 2010-11.
- **Catch-Up Claim**: If depreciation was not claimed in the previous years, you may need to adjust your tax filings to include this.
**3. **Book vs. Tax Depreciation**:
- **Accounting Depreciation**: Amortization as per AS 26.
- **Tax Depreciation**: Depreciation as per Section 32 (25% per annum).
**4. **Tax Adjustments**:
- **Compute Depreciation**: For the years 2010-11 to 2012-13, calculate the depreciation that should have been claimed.
- **File Revised Returns**: If required, file revised returns for the years where depreciation was missed.
### **Steps to Handle the Delayed Amortization/Depreciation**
1. **Calculate Amortization/Depreciation**:
- Determine the total amount of amortization and depreciation that should have been accounted for from FY 2010-11 to FY 2012-13.
- Calculate the annual amounts and total missed amortization/depreciation.
2. **Adjust Financial Records**:
- **Accounting Records**: Start amortizing the goodwill from FY 2013-14 forward, ensuring to adjust prior years' books for any missed amortization.
- **Tax Records**: Compute and claim any missed tax depreciation for previous years. Amend tax returns if necessary.
3. **Consult with a Professional**:
- **Tax Advisor**: Consult a tax advisor to ensure compliance with tax laws and proper filing of revised returns if required.
- **Accountant**: Work with an accountant to adjust the financial statements and ensure proper amortization going forward.
### **Summary**
- **Accounting Treatment**: Start amortizing goodwill as per AS 26 from FY 2013-14. Adjust the books for previous years if needed.
- **Tax Treatment**: Claim depreciation on goodwill at 25% per annum as per Section 32, starting from the first year of use. Adjust previous years' tax returns if depreciation was not claimed.
By following these guidelines, you can align your accounting and tax treatments for goodwill and ensure accurate financial reporting and compliance.
### **Accounting Treatment (AS 26)**
**1. **Amortization of Goodwill (AS 26)**:
- According to AS 26, goodwill should be amortized over a period not exceeding 10 years from the date of acquisition.
- **Amortization Period**: Since the goodwill was acquired in FY 11, the amortization period should start from FY 11 and end in FY 20.
**2. **Starting Amortization**:
- **Delayed Start**: If amortization has not yet started, you can start amortizing goodwill from FY 2013-14. You will need to adjust the previous years to reflect this change in accounting treatment.
**3. **Book Adjustments**:
- **Compute Amortization**: Calculate the annual amortization amount for the remaining period of the 10-year window.
- **Make Adjustments**: Record the amortization expense in the books for FY 2013-14 and subsequent years.
**Example**:
- **Goodwill Amount**: ₹100L
- **Remaining Amortization Period** (from FY 2013-14): 7 years
- **Annual Amortization**: ₹100L / 10 = ₹10L
**Journal Entries**:
For FY 2013-14:
\[ \text{Amortization Expense} \text{Dr.} ₹10L \]
\[ \text{Goodwill} \text{Cr.} ₹10L \]
### **Tax Treatment (Section 32 of the Income Tax Act, 1961)**
**1. **Depreciation on Intangible Assets**:
- As per Section 32 of the Income Tax Act, intangible assets, including goodwill, are eligible for depreciation at the rate of 25% per annum on the written down value.
**2. **Tax Implications**:
- **Depreciation Claim**: You should claim depreciation on goodwill starting from the year when the asset was first used. This would typically be FY 2010-11.
- **Catch-Up Claim**: If depreciation was not claimed in the previous years, you may need to adjust your tax filings to include this.
**3. **Book vs. Tax Depreciation**:
- **Accounting Depreciation**: Amortization as per AS 26.
- **Tax Depreciation**: Depreciation as per Section 32 (25% per annum).
**4. **Tax Adjustments**:
- **Compute Depreciation**: For the years 2010-11 to 2012-13, calculate the depreciation that should have been claimed.
- **File Revised Returns**: If required, file revised returns for the years where depreciation was missed.
### **Steps to Handle the Delayed Amortization/Depreciation**
1. **Calculate Amortization/Depreciation**:
- Determine the total amount of amortization and depreciation that should have been accounted for from FY 2010-11 to FY 2012-13.
- Calculate the annual amounts and total missed amortization/depreciation.
2. **Adjust Financial Records**:
- **Accounting Records**: Start amortizing the goodwill from FY 2013-14 forward, ensuring to adjust prior years' books for any missed amortization.
- **Tax Records**: Compute and claim any missed tax depreciation for previous years. Amend tax returns if necessary.
3. **Consult with a Professional**:
- **Tax Advisor**: Consult a tax advisor to ensure compliance with tax laws and proper filing of revised returns if required.
- **Accountant**: Work with an accountant to adjust the financial statements and ensure proper amortization going forward.
### **Summary**
- **Accounting Treatment**: Start amortizing goodwill as per AS 26 from FY 2013-14. Adjust the books for previous years if needed.
- **Tax Treatment**: Claim depreciation on goodwill at 25% per annum as per Section 32, starting from the first year of use. Adjust previous years' tax returns if depreciation was not claimed.
By following these guidelines, you can align your accounting and tax treatments for goodwill and ensure accurate financial reporting and compliance.
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