Deferred tax assets and enterprise value calculation

[Guest fedcep]

I am aware that there is a previous topic about deferred tax assets. I am starting a new one because the previous one dealt with DTA versus flows, and it was from 2011.

 

I'd appreciate to hear your thoughts on the role of deferred tax assets when valuing a company strictly from a balance sheet perspective, assuming the business is a going concern. Most specifically, in regards to the calculation of enterprise value. Ie,

 

Market cap

(-) Cash

(+) Debt

(?) Deferred tax assets

=

Enterprise value

 

I have my own views but would rather express them later so as not to set any bias.

 

Thanks in advance.

[beerbaron]

DTA should be valued at:

 

DTA*Tax Rate*Probability That you think the profits could happen

 

Conservatively I would put 15 cents on the dollar.

 

BeerBaron

[LC]

DTA should be valued at:

 

DTA*Tax Rate*Probability That you think the profits could happen

 

Conservatively I would put 15 cents on the dollar.

 

BeerBaron

Also time value of money. Those DTAs are going to be used year into the future, not today. I agree with valuing them at 15-25c on the dollar.

[Packer16]

For US GAAP, it is my understanding that DTAs on most balance sheets include a reserve to account for the portion that will not be used.  This reserve is re-estimated every Q by management.  I also think they include the tax effecting.  The footnote disclosure should tell you this.  It does not include a PV factor so you will have to make an adjustment there.

 

Packer

[ItsAValueTrap]

As a general rule, accounting firms will usually put out really good white papers on complicated tax issues.  They put out this free information because they want to get customers to pay for their really expensive fees.  But you can still enjoy the free information they give out.

 

Here is some information about valuing deferred tax assets on PWC's website:

http://www.pwc.com/gx/en/communications/telecom-industry-accounting-group/valuing-deferred-tax-assets.jhtml

 

2- I don't put that much importance on DTAs when I look at companies.  It is usually a small detail that doesn't matter. 

 

It can matter if a company has huge amounts of operating losses.  But with those types of companies, you need to be extremely concerned about whether or not that company is going to make money going forward.  If they are going to make tons of money, the DTAs are just icing on the cake.  If they aren't going to make lots of money, then your investment may go to 0 regardless.  You need to pay the most attention to the company's ability to make money- not the DTAs.

[Packer16]

You are correct for the most part but their are niches like radio, TV and cable where there are a good amount of NOLs which will be used in the next few years to significantly reduce taxes. 

 

Packer

[finetrader]

BAC and AIG have a lot of DTA.

For those , I don't count the DTA when looking at the balance sheet because I'm interested in TBV. But I add the tax saved to GAAP earnings.

[JEast]

For a small DTA, just ignore it.  For a very large DTA, there are other considerations besides if a company can earn a profit.  For example, would a large DTA be valuable to another company??  I think an 80% haircut for a very large DTA is way too conservative.

 

Cheers

JEast