Impact of NOLs on CF Statement

Hey guys,

I have a question on accounting for NOLs and the impact on the CF statement.

Correct me if I'm wrong on this: If I apply a nol carry forward this year to reduce my taxable income (and thus my taxes), my net income will increase by .40 x NOL balance.

On my cash flow statement, my cash has already increased by this amount since net income flows through, but do I adjust for the change in the deferred tax asset account when I'm adjusting for changes in working capital? If so, it almost seems like double-counting (increase from cash due to 1. net income increase and 2. decrease in DTA).

Basically, I'm trying to figure out if applying a NOL creates an additional cash event due to the change in deferred tax assets.

Thanks in advance for the help!

 
Best Response

I believe carrying an NOL forward reduces income taxes payable, not expense.

You have the following operating income:

2008 (100,000) 2009 400,000

40% tax rate

In 2008, we record a $40,000 NOL Asset on the balance sheet. In 2009, assuming no other differences, our income taxes payable is $100,000. So before applying the NOL our entry is:

Income Tax Expense $100,000 -- Income Taxes Payable $100,000

We apply all of the NOL. Need to credit it to reduce it because it's an asset:

Income Tax Expense $100,000 -- NOL Tax Asset $40,000 -- Income Taxes Payable $60,000

Does that make sense? Basically just underscoring the fact that NOL doesn't affect expense.

MM IB -> Corporate Development -> Strategic Finance
 

Thanks for the response. What I'm still confused about is that in your scenario, applying a NOL carry forward has essentially no cash impact. Is this always the case?

Since it does not affect income tax expense, net income remains unchanged. And had you not applied the NOL, the adjustments on the CF would simply be an add back of $100,000 due to the increase in income taxes payable - thus the NOL had no effect on cash from operating activities. I've always thought applying a NOL would be a cash event - am I missing something here?

 

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