Currently grinding LBO prep and am still pretty confused about the relationship between asset write-ups and DTLs. Maybe I'm just completely misunderstanding this, but I thought the idea was that asset write-ups create increased depreciation expense that reduce book pre-tax income, but they do not affect pre-tax income for tax accounting purposes.
So if we are actually paying more cash taxes due to asset write-ups than what we record on the books, why is this creating a DTL instead of a DTA (according to WallStreetPrep)? Am I just getting the book and tax depreciation switched up in my head?
Think of it like this: You pay taxes on an asset valued at $100. You then realize the asset is actually worth more, and write up the asset to $200.
So you paid taxes as if it was worth less than it actually is. You now owe taxes on the difference, hence a DTL.
So in an M&A transaction, does that mean the buyer creates the DTL that needs to then be unwound?
The govt. doesn't recognize the associated D&A from the asset write-up for tax purposes, meaning your cash taxes > book taxes. Since your GAAP IS now doesn't reflect the full tax outflow required to the govt., the DTL is created to bridge that difference and is unwound (as an outflow) over time.
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