DTA/ DTL after LBO
Hi all,
Having troubles understanding this so any input highly appreciated.
When adjusted the BS for the LBO in the LBO model; what happens to existing DTL and DTA? - Are the wiped off the BS and replaced with new ones? - Are they kept constant in the future for simplicity? - How do I create the new DTA and DTLs?
Thank you!
Also interested.
Also interested
In R&P they add the newly created DTL to the existing DTL and amortize only the newly created DTL over 15 years. It seems like they keep the existing DTL constant as a simplification. And DTL is calculated as following: (Tangible Assets Step Up + Intangible Assets Step Up) * Tax Rate
Thank you. What happens to DTA?
I'm not sure here, paging Tamara_S who's been super helpful on this forum to see if she can answer that.
Logic tells me that DTA should be created in reverse of DTL - when you step down the value of assets. But I'm not sure.
and how is the DTL affecting the paid taxes in the income statement each year?
And how do these DTLs affect taxes paid on IS
When you get down to EBT you add back the non-tax deductible D&A from the intangible and tangible assets step up. That gets you to your taxable income, from which you need to subtract the income tax and the DTL amortization (annual D&A from intangible and tangible assets step up x Tax rate) to get to net income.
This is wrong for LBOs - you read the section on Merger Models in R&P book
LBO is just one of the subsets in M&A, it doesn't matter if you use 70/30 Debt to Equity, all cash or all stock - the way DTL/DTA are created in this context is through asset step-up/step-downs.
My thoughts: I would create a section for DTLs. First, link a line to book taxes (which are the income taxes as they appear on IS). Then link a line to pre-tax IS + add-back the resulting annual D&A from write-ups, and then apply tax rate to get cash taxes. Cash taxes should be > book taxes, and the difference is the resulting DTL (charge) for that year. As a result, reduce DTL balance on BS liabilities by that annual (charge) amount each year. On CF from Operations, apply the decrease in DTL as a (use) of cash when figuring out FCF.
Income Taxes Paid = Income Taxes (Book Accounting, IS) + DTL (Reconciliation) I would make a separate section instead of adding a sub-bullet to income taxes on IS since the whole point is to emphasize that GAAP financial statements use book accounting (and therefore you should not have a DTL line item in the income statement).
Is this correct? I'd like to know how to apply DTAs. Do they get recorded on Asset under BS at the full taxable loss or at a tax-effected rate (tax rate * taxable loss)? How does the accounting work for this? Do we lower pre-tax income and then apply taxes or do we run taxes as normal and then add back some amount due to NOL usage under CFO?
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