Hi everyone,
Just wanted to see if there is anybody out there able to help me understanding the following:
I really appreciate your help.
Cheers.
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I think the answer has to do with asset write ups -- someone correct me if I am off the mark.
When you do an M&A deal, Your purchase price will exceed the net book value of the assets. You allocate part of that to your brick and mortar assets, some of it to intangibles, and the rest gets classified as goodwill.
Now about those written up assets...
On your tax books, you depreciate this written up asset with MACRS, which is the accelerated depreciation schedule.
On your financial books, you straightline it, which is slower relative to MACRs.
This means that for tax purposes, you are getting more of a depreciation sheild today, and less in the future. Which means you pay less taxes now and more in the future.
On your financial books, your taxes are still calculated off of straightline depreciation.
Hence, what you end up getting is a liability (obligation to pay more in the future) on your financial books to account for the difference between financial taxes and tax taxes (this is your DTL)
I would appreciate it if someone could confirm here.
That is correct. DTLs generally arise from differences between financial and tax accounting including depreciation and amortization schedules (GAAP SL vs. tax MACRs) and asset lifing issues between book and tax.
Yep monkey147 got it, though not all assets depreciate slower on your books compared to MACRs so you may end up with deferred tax assets in some cases.
I dont understand.
It appears that everyone simply answered what "deferred tax liabilities" are. The answers provided are standard exist in absence of M&A.
So isn't the inital question essentially wrong ? DTL dont arise from PPA from M&A they arise from differences in GAAP and tax actg.
When you do a PPA sometimes you will write up some of the assets that have already been depreciated by the other company. The IRS won't let you depreciate the same asset twice i.e. Company A buys a building for 100 depreciates it down to 20, Company B buys company A does a PPA and says the building is worth 50; for purposes of the companies taxes it can't get credit for depreciating the property from 50 to 20 but they can from 20 to 0
Also, the asset-wrtie up cannot be taken on the goodwill side as the goodwill takes into account only the target balance sheet. Once the asset is "writen-up" and a pro-forma structure is created, there will be a difference in assets and liabilities which goodwill can not account for. This innately becomes your deferred tax basis and as such can be used to offset your "cash taxes" to the IRS.
Thanks guys for your comments...
stevenbn: But in this case, wouldn’t you have a DTA instead of DTL? Since your tax books will show higher profits???
MezzCat: Can you elaborate more on that? I couldn’t understand your point…
I'll try to be more specific here to narrow our discussion: I saw the following in a model:
Excess over book value to be allocated: $100
ALLOCATION Write-up of assets to FMV: $50 Identifiable Intangibls: $20 Goodwill (before deferred taxes): $30
Deferred Tax liabilities @40%: [($5040%) + ($2040%)] = $28
Total GW impact: $30 + $28 = $58
So, what this model does is to create a DTL over the portion allocated to write-up to FMV and Intangibles. And the same DTL balance is summed to GW... Now, my question is: does anyone know why we create this $28 as DTL in this example (that is also grossed up into GW)???
I thought the asset seller has to pay a recapture. The new owner of the asset get to put it on the books at the full amount.
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