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How are NOL carried in balance sheets?


beerbaron
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Hi, I reviewing a company with a huge amount of Net Operating Losses but I'm trying to asses the value of these and how exactly they are represented on the balance sheet. So maybe someone can help me here.

 

Where are NOL represented in the balance sheet? Are they off balance-sheet?

How do you asses their value?  (NOL * Taxe Rate *Time Value of Money) ?

How can you determine their distribution in time?

Can NOL be used to bring a tax rate to 0% or NOL can only be used on a certain amount of income?

 

Thanks

BeerBaron

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http://www.accessmylibrary.com/article-1G1-148719197/net-operating-losses-much.html

 

"An NOL occurs when a company's total tax-deductible expenses exceed its taxable gross revenues. The good news for a company incurring an NOL is that it will owe little or no current income tax liability. The bad news is that the excess deductions provide no current-period tax savings. Taxing authorities frequently attempt to mitigate this potential loss of tax benefits by using NOL carryback and carryforward provisions. For example, current U.S. federal income tax provisions allow a corporation to carry its NOL back two years and/or forward 20 years, to be deducted against taxable income reported in these carryback and/or carryforward years. The application of NOLs in this manner could create tax refunds in the carryback years when taxes were previously paid and potentially could reduce tax liabilities in carryforward periods as well. FAS-109 allows these potential tax savings to be recorded on the company's balance sheet as a deferred tax asset, given that positive future cash flows are expected from the tax savings generated by the NOL's use.

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"Where are NOL represented in the balance sheet? Are they off balance-sheet?"

 

FAS-109 also requires that a company establish a valuation allowance (similar to the allowance for doubtful accounts) when management believes it is more likely than not that some or all of a deferred tax asset will not be realized. Thus, management is required to assess the probability that the company's NOLs will generate tax savings and reduce the reported deferred tax asset whenever there is a greater than 50 percent probability that some or all of the NOLs will expire unused. Consequently, a significant amount of management judgment is required in this area and potentially provides yet another earnings management opportunity, particularly given the weak internal controls that apparently plague so many companies in the tax-reporting area. "

 

 

How do you asses their value? (NOL * Taxe Rate *Time Value of Money) ?

 

Correct

 

How can you determine their distribution in time?

 

You can't know this for sure.

 

Can NOL be used to bring a tax rate to 0% or NOL can only be used on a certain amount of income"

 

Usually it has to be matched with the subsidiary that holds the business and it's jurisdiction. This involves some aspects of tax planning and clearly if a management has large NOL's in a company they will try to mostly make investments that can legally utilize them otherwise it's a waste.

 

PS. You may need a local library account to view the complete article above.

 

And a summary of FASB 109: http://www.fasb.org/summary/stsum109.shtml

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They are carried in the US based on a 20 year horizon - accumulated unused losses x tax rate.  No NPV calc's involved here in the US.

 

If it is more likely than not that they can't be used, a valuation allowance will be recorded to offset the asset (carried on the f/s as a deferred tax asset).

 

Usually companies need to show a history of earnings in order to avoid a valuance allowance. 

 

 

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