Accounting questions

[valuefinder0525]

Dumb question but....

 

How do people usually model deferred tax liabilities in their models?

[jschembs]

I don't think that's a dumb question at all. It really depends on whether or not you think the company will continue to operate in a manner that created the DTL. For example, a growing manufacturing enterprise will likely continue to grow its DTL as it depreciates a growing asset base more rapidly for tax purposes than book purposes. Obviously Buffett believes his DTL, largely due to unrecognized capital gains, will continue as he holds those positions and they grow in value over time. In these situations, the DTLs should probably be treated more like equity.

 

On the other hand, if you've got a business in decline with large DTLs, those should probably be treated more like debt.

[valuefinder0525]

I don't think that's a dumb question at all. It really depends on whether or not you think the company will continue to operate in a manner that created the DTL. For example, a growing manufacturing enterprise will likely continue to grow its DTL as it depreciates a growing asset base more rapidly for tax purposes than book purposes. Obviously Buffett believes his DTL, largely due to unrecognized capital gains, will continue as he holds those positions and they grow in value over time. In these situations, the DTLs should probably be treated more like equity.

 

On the other hand, if you've got a business in decline with large DTLs, those should probably be treated more like debt.

 

Thanks a lot for the explanation. How about the actual numbers? For example, for the declining business, would you increase the taxes in the next couple of years if you think the DTLs will decline and you will have to pay higher cash taxes?

[jschembs]

I don't think that's a dumb question at all. It really depends on whether or not you think the company will continue to operate in a manner that created the DTL. For example, a growing manufacturing enterprise will likely continue to grow its DTL as it depreciates a growing asset base more rapidly for tax purposes than book purposes. Obviously Buffett believes his DTL, largely due to unrecognized capital gains, will continue as he holds those positions and they grow in value over time. In these situations, the DTLs should probably be treated more like equity.

 

On the other hand, if you've got a business in decline with large DTLs, those should probably be treated more like debt.

 

Thanks a lot for the explanation. How about the actual numbers? For example, for the declining business, would you increase the taxes in the next couple of years if you think the DTLs will decline and you will have to pay higher cash taxes?

 

Exactly.