deferred tax liability

[erwar]

Hello all, here’s my first question. When analyzing deferred liabilities that are expected to never reverse we should treat them as equity for ratio analysis. My question is, why would this event rise? doesn’t this mean that we will owe to the government forever? is the government ok with a business never paying this liability? For analytical purposes, I think the transition to equity benefits a company or not?

thanks a lot in advance for your answers

E.

[S2000magician]

@erwar

Hello all, here’s my first question. When analyzing deferred liabilities that are expected to never reverse we should treat them as equity for ratio analysis. My question is, why would this event rise?

The most common situation occurs when a company is growing (investing in PP&E), using straight-line depreciation for its financial statements, and using accelerated depreciation for taxes. For the foreseeable future, the DTL will grow or remain constant, but will not decline.

@erwar

doesn’t this mean that we will owe to the government forever?

No. It only means that the present value of the (eventual) payment is negligible.

@erwar

is the government ok with a business never paying this liability?

They’re OK with it the company using accelerated depreciation for tax purposes. They don’t care about the DTL per se.

@erwar

For analytical purposes, I think the transition to equity benefits a company or not?

Comme ci, comme ça.

Debt-to-equity will be better, for example, but ROE will be worse.

@erwar

thanks a lot in advance for your answers

My pleasure.

[erwar]

thanks a lot, sir.

[S2000magician]

You’re welcome.