Deffered Tax-A dilemma.

Replies to This Discussion

Permalink Reply by Sachidanand (Sacha) Singh on December 8, 2008 at 12:07pm

My two cents. The purpose of introducing deferred tax asset / liability is essentially to reduce teh timing differences in reported earnings and taxable earnigs. If we keep aside other items and concentrate on depreciation, we get deferred tax liabilities in initiial years, which get reduced (unless new fixed assets are taken which will cause it to increase) as teh years pass.
Should we consder deferred tax while estimating DSCR? Depends on how we view DSCR. Is it
(PAT + Depreciation) / Annual installments, or
Annual Cashflow / Annual interest and installments

In corporate finance, normally it is the cash flow available to meet interest and principal payments on debt (including payments to DSRA or to any sinking fund). Equating deferred tax to current tax will definitely be a very conservative approach and we may even get away with it at times but eventually it should lead to adverse selection.

An interesting way of looking at it will be how would we react if the operations of the applicant firm were creating deferred tax assets in the initial years instead of deferred tax liabilities? (Though, consistency is not always a virtue.)

▶ Reply to This

Permalink Reply by Yasir Bilal on April 12, 2010 at 2:56am

Will you please give me a comprehensive example of how the provision for taxation is calculated bifercating the current and deffered taxes.

I need to0 have thorough understanding of each and every case/scenario of taxation and their presentation of financial statements and the treatment in subcequent period as well.

Though i have good understanding about those but not very clear as far as practical experience of preparing financial statements .

▶ Reply to This

Permalink Reply by Bonolo Paul Nare on April 5, 2009 at 1:40pm

I have come accross similar situations. A project that I am working on results in deferred tax assets at the early stages. The project will be in a profitable position to utilise the deferred tax savings arising from this asset in long run, over a long period of time.

Including the deferred tax asset results in a positive NPV while excluding it makes the project not viable as the IRR, MIRR, NPV and PI become unfavourable. Should we treat deferred tax assets and liabilities in the same manner given the opposite impacts these have on our discounted cash flows?

▶ Reply to This

Permalink Reply by Sachidanand (Sacha) Singh on April 5, 2009 at 1:58pm

Stick to cash flow. DTA in early years will help save on taxes later that would translate into cash.

▶ Reply to This

Permalink Reply by AMIT KUMAR on April 8, 2009 at 5:49am

Hi Astain,

If you are taking the whole depreciation as expenses the DTL should be added to cash for calculation of DSCR. It also depends upon the nature of company whether the DTL will increase or come down in future. In normal growing company you can add the DTL in cash accruals.

Amit

▶ Reply to This

Permalink Reply by Dipu James on April 9, 2009 at 4:27am

From what ever little i know
I would suggest adding back the deferred tax for analysis, and not to consider as a cash outflow.

Logic - Time value of money

▶ Reply to This

Permalink Reply by Werner Reisacher on May 21, 2009 at 10:58pm

The issue you raised is rather complex. As a general principle, and in line with Sacha, stick with cash flow. It is up to the personal who is reviewing the ratios to interprete special situations.
Apart from this "ratio issue" I would be more concerned about the ethical business conduct and the rule of prudent accounting if companies are creating "material defered tax assets" over a continued period of various years. Coompanies should not convert tax credits of pre-tax losses unless there is a high degree of certainty that these tax assets can be used to compensate for tax liabilities resulting from business profits. We should always look at each asset balance that we keep in our balance sheets very critically to be sure that they to represent an economic benefit for the company and that their deferral is based on the certainty that they will eventually be matched to offsett resulting liabilities for positive operating results.
Werner Reisacher

▶ Reply to This

Permalink Reply by Aditya Gupta on September 15, 2009 at 7:43am

Deffered Tax (Asset) / Liability generally arises on two accounts:
1) Use of WDV method by Taxman and also the the proproation of the asset not qualified for tax deduction
2) On account of Tax Losses
These two reasons Increase / Decrease your Taxable profit which is different from your PBT.

Whereas DSCR is calculated based Cashflow availble for Debt Service and Debt Service (Principal + Interest) for the period.

So Deffered tax doesn't have a direct bearing on your Cashflow. It's just a accounting treatment of Tax difference between Tax actually paid and Due beacuse of your PBT and should not be included in calculation of DSCR which measure your operational efficieny.

▶ Reply to This

Permalink Reply by Jatin on March 15, 2010 at 1:48pm

I agree with most of the comments on this.

While assessing the DSCR, the capacity of repayment and the carrying cost of loan should be the considered over cash flow available before distribution to either lender or investor. As regards, Deferred Tax liability/Asset it just the accounting treatment of provisioning for future tax liability or tax credits. Hence, does not even consider the present value of cash blocked on this account.
Tax should be modeled based on the MAT or tax profit actual outgo should be considered.

▶ Reply to This