so we all know that the traditional formula is Mkt Cap + Total Debt - Cash.
A company i’m looking at has good amount of Deferred Tax Liabilities listed as “Other Long Term Liabilities” on the balance sheet. Should I be including this Deferred Tax Liability as debt in my calculation?
Given you said a good amount, yes.
that really depends on the purpose of your “EV caclulation”
depends on expected holding period, i’d probably factor some of it in though
It depends - but you probably do not want to include in your EV.
My guess is that (1) your target company is US based, (2) does significant acquisitions, and (3) the are audited by PwC/Deloitte/EY/KPMG – the mid-tier firms aren’t tax savvy enough to scrutinize this.
If the DTL is driven by the fact the customer relationships and other finite-lived intangibles are amortized for GAAP purposes but not deductible in a C Corporation for tax purposes, then this liability does not create a cash obligation to the company, and will result in be settled through the passage of time through lower GAAP tax expense relative to cash taxes paid. This DTL is established in order to ‘tax affect’ the future amortization, and is based upon the statutory (not effective) tax rate applied to the customer relationships – a combination of both state and local taxes.
At Acquisition Date (assume 1,000 customer relationship, 35% fed tax rate, 5% state tax rate):
Dr. Goodwill 1,400
Cr. Customer Relationships (1,000)
Cr. Deferred Tax Liability (400 OR 1,000 x 0.4)
Annual (assume amortization over 10 years):
Dr. Amortization Expense (100)
Dr. Deferred Tax Liability (40)
Cr. Tax Expense Benefit (40)
Cr. Customer Relationship Accumulated Amortization (100)
How likely is it they will actually incur those? How likely during your holding period? Interesting question
You should analyse the relevant tax note to see the source of the taxable temporary differences.
In doing this you need to estimate whether the DTLs are going to reverse in the near future through the process of depreciation/amortisation of are they going to crystallise on a sale of an asset/settlement of a liability.
In the former case, no cash is affected, DTLs fluctuate in the P/L and SFP and with time disappear.
In the latter case, there is no real present obligation, as the event triggereing the payment of tax will be eg the sale of an asset.
Assume you have a portofolio of AFS assets of $100 and you revalue them to $200. There will be an immediate DTL of ($200 - $100) * t which will be reflected in OCI given ofcourse capital gains are taxed @ corporate level.
Do we really need to reflect this liability as present? It’s up to you and is a matter of judgement. Will the asset/liability be sold/settled in the ST? or maybe the asset is held for the LT. How likely is that this DTL will crystallise in a cash outflow?
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