Accounting impact related to no depreciation on Goodwill

Here is the technical accounting and tax resolution for this issue:

1. Income Tax Impact (No Depreciation on Goodwill)

• Tax Depreciation: From FY 2020-21 onwards, goodwill is completely excluded from the block of assets. No tax depreciation can be claimed under Section 32 of the Income Tax Act.

• Cost of Acquisition: If the goodwill was previously depreciated for tax purposes up to FY 2019-20, the closing WDV as of March 31, 2020, becomes the modified cost of acquisition for calculating capital gains if the business or goodwill is sold in the future.

2. Accounting Treatment (Book Depreciation & Impairment)

• No Change in Book Depreciation/Amortization: The amendment is strictly a tax law change. Under Indian Accounting Standards (Ind AS 38) or Accounting Standards (AS 26), you must continue your regular accounting treatment.

  • If you follow AS 26, continue amortizing goodwill over its useful life.

  • If you follow Ind AS 38, goodwill is not amortized but must be tested for impairment annually under Ind AS 36.

3. Treatment of Existing Deferred Tax Liability (DTL)

Prior to the amendment, a difference existed between the book value and tax value of goodwill, creating a temporary difference and resulting in Deferred Tax. Because tax depreciation is now permanently disallowed, this temporary difference changes context:

• Under Ind AS 12 (Income Taxes): Goodwill recognition has an initial recognition exemption. However, for subsequent changes or business combinations, if a DTL was previously recognized on the tax deduction of goodwill, it must be re-evaluated. Since tax depreciation is now zero going forward, the tax base of the goodwill becomes zero (except for future capital gains purposes).

• Reversal / Adjustment: If the tax deduction is permanently lost and the temporary difference will no longer reverse through regular operations, the existing DTL created due to past tax depreciation benefits needs to be reversed through the Statement of Profit and Loss (under the "Deferred Tax" line item) in the year the amendment became effective, as it is no longer a temporary timing difference that will reverse over time.

Summary

• Tax Impact: Goodwill is removed from the block of assets; tax depreciation is 0% from FY 2020-21.

• Accounting Impact: No change to books. Amortize per AS 26 or test for impairment annually per Ind AS 36.

• DTL Treatment: Existing DTL related to the future tax depreciation of goodwill must be reversed and credited to the Statement of Profit & Loss, as the tax depreciation benefit has been permanently disallowed.