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Deferred Tax Assets and Tax Reform
Tuesday, February 20, 2018

In our continuing effort to give Calcbench subscribers more understanding about the data we are seeing related to tax reform, today we wanted to focus specifically on deferred tax assets and liabilities. Without further delay, then, here is a quick primer.

Q: So exactly what are deferred tax assets and liabilities, anyway?

A: They are the difference between what a company pays in taxes and what it actually owes. That can happen for any number of reasons. For example, the company might assume one tax position when it files its financial statement, and the IRS later determines that the company owes a different amount. Or a company might have net operating loss carryforwards, or tax credits, or other items that come into the picture.

The key point is that when a company pays more in taxes than it actually owes, that extra amount becomes a deferred tax asset: a tax payment the company can claim as a credit for whatever taxes it will owe in future years. In practical effect, the deferred tax asset will lower the company’s tax rate in future years.

Conversely, when a company pays less in taxes than it actually owes, that underpayment becomes a deferred tax liability: taxes that the company will need to pay eventually. A deferred tax liability increases the company’s tax rate in future years.

Many large companies have both deferred tax assets and liabilities. So the company can add them together to determine its “net” deferred tax position.

Q: Why is tax reform hitting them so forcefully?

A: Because of the cut in the statutory tax rate from 35 to 21 percent. A lower tax rate means your deferred tax assets are now less valuable — and, likewise, that deferred tax liabilities are less painful. Companies must remeasure the value of their “DTAs” against the new 21 percent rate, and that has led to the large write-downs we’ve seen in recent weeks. In some cases, large companies with DTAs piled on the books have had to write down billions of dollars.

Q: How are companies reporting these changes?

A: The write-downs on DTAs ultimately get reported on the income statement. That is why we’ve seen a parade of banks reporting big losses in fourth quarter 2017: they amassed tens of billions in deferred tax assets, mostly due to the losses they suffered during the financial crisis 10 years ago. Now they must take steep write-downs on those assets, which translate into losses far bigger than their income from normal operations.

Hence they are declaring losses thanks to tax cuts. It’s a bit counter-intuitive at first glance, but it makes sense when you think about it.

Other businesses that suffered big losses sometime in the past (BP, for example, after the 2010 oil spill; car companies, which were on life support circa 2009) are also reporting losses as well.

Q: Is this the “Big Bath” I read about sometimes?

A: Yes, in the sense that many companies are getting all their DTA write-downs done in one fell swoop. Once companies have that unpleasant business behind them, they get to enjoy those 21 percent tax rates forever more.

Q: How long will this continue?

A: Companies with a Dec. 31 fiscal year-end will file their annual statements within the next few months. (The S&P 500 will file within the next several weeks.) That will give us the lion’s share of what companies are going to disclose about DTAs and tax reform. Other companies with other fiscal year-end dates will file later, so we won’t get a complete picture until later into 2018.

Q: How can Calcbench help me monitor these items?

A: Funny you should ask. Deferred tax assets and liabilities are reported on the balance sheet as current assets (or liabilities) — but lots of other items can be part of current assets or liabilities, too.

The details about DTAs are buried in the footnote disclosures. So when researching an individual company, use our Interactive Disclosure page and look for “Schedule of Deferred Tax Assets and Liabilities” in the Footnote Table search box, middle of the page. (See Figure 1, below, circled in blue.)

You can also search for “Income Taxes” in the Choose Footnote Disclosure field, left side of the page. (Figure 1, circled in red.) That will display the schedule of deferred tax assets and liabilities, plus the company’s narrative disclosure about those items — including the possible effects of tax reform.

Q: Cool, but I want to look at DTAs in bulk, among many companies.

A: We got you. In that case, use our Multi-Company page. First, set the peer group you want to study. Then you can use the “Search XBRL Tags” field in the middle of the page to search any number of items related to deferred tax assets and liabilities. Start typing “deferred” and you’ll see the potential tags appear. Select the one you want, and Calcbench will pull up that data for all companies in the peer group you created.


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