PPE Writedown DTA/DTL Question (3 statements)
Currently working through PPE writedown questions and facing a stumbling block. I understand that PPE writedowns aren't cash tax deductible until they are sold/depreciated fully but I don't understand the DTA that is created.
For ex. $200 PPE, $50 writedown, 20% tax - 3 statements
IS:
$200 Revenue
-$50 Writedown
$150 Pretax
== $120 Net Income
-> $30 book taxes but $40 cash taxes assuming no tax benefit
CF:
$120 NI
(Add-back) $50 Writedown
-$10 DTA created (or is it $30??)
== $140 net cash
BS Assets:
$160 cash
$150 PPE
$10 DTA
== $320
BS Liabilities:
$200 Prev RE
$120 NI
== $320
Which is the correct analysis here?
a) Make a DTL because you underpaid on cash taxes by $10 (supposed to pay $40 cash but you only booked $30 on book)
b) You make a DTA because you aren't supposed to pay taxes on the writedown in the future so every tax you paid on book should be 0, thus giving you a DTA of $30?
c) neither and I'm bad at accounting
would appreciate any help
Based on the most helpful WSO content, here's a detailed breakdown of the PPE writedown and its impact on the three financial statements:
Income Statement (IS):
Cash Flow Statement (CF):
Balance Sheet (BS):
Assets:
Liabilities and Equity:
Analysis:
Conclusion:
The correct analysis is Option b). You make a DTA because the writedown is not immediately tax-deductible, and you will receive a tax benefit in the future.
Sources: Write Down of PPE by 100, DCF Modeling Course ~ Pre-training text.pdf, Difficult Accounting Technical - IBD, TRICKY Enterprise Value Technical Question, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1
From a raw accounting basis, I believe it’s a variation of a) where you “overpaid” on cash (40 cash v 30 book) and a DTA is created to compensate/adjust the difference (30 - 40 = -10 for DTA on CFS)
Your intuition is correct; $10 DTA. From a GAAP perspective, you essentially "prepaid" tax expenses by $10, so you set up a $10 non-cash asset just like you would any other pre-paid expense that hadn't yet been recognized.
As a general comment, if you're walking someone through your answer, only state the marginal changes in your financial statements (unless told otherwise). So if given the question in your example "$200 PPE, $50 writedown..." don't add revenue, starting retained earnings, etc. you'll just wind up confusing your interviewer.
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