How would a DTL (created during M&A or LBO acquisition) flow through the 3 financial statements? In particular, how would the IS, BS, and CFS change during:
a. The first year, when you acquire the company, write up the assets, and create the DTL
b. The following year, when you begin depreciating your asset and decreasing the DTL
Could someone provide sample walkthroughs for both situations? Any simple numbers are ok.
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I’ll simplify this a lot to just get a base understanding down.
A (Post-transaction). Let’s say it’s a $100 write up. 20% Tax rate means you’ll create a $20 DTL. On your pro forma balance sheet, that $20 will appear as a liability. Also keep in mind, when calculating goodwill, the asset write up will decrease goodwill created, and the DTL will increase it.
B. Let’s says we amortize the $100 write up over 10 years. That means each year we will see the DTL balance decrease by (100/10)*20% = 2. - IS - No change - CFS - Cash decrease of $2 (because of DTL unwind) - BS - cash decreases by $2, DTL balance decreases by $2
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