Do Deferred Tax Liabilities Reduce Business Value?

Deferred Tax Liabilities (DTLs) and Deferred Tax Assets (DTAs) are common features in company financial statements. However, their treatment in a business valuation particularly in expert reports for litigation, tax disputes, or shareholder matters, often causes confusion and disagreement.

Accounting standards present deferred tax assets and deferred tax liabilities symmetrically.
Valuation practice does not always treat them symmetrically.

This page explains the distinction between accounting recognition and economic valuation, and outlines when deferred tax items should, and should not, affect assessed business value.

Accounting Treatment of Deferred Tax

Deferred tax arises from temporary differences between accounting profit and taxable profit.

• A Deferred Tax Liability generally arises where tax deductions have been accelerated ahead of accounting expense recognition.
• A Deferred Tax Asset generally arises where accounting losses or provisions may provide future tax deductions if sufficient taxable profits arise.

For financial reporting purposes, accounting standards require both DTAs and DTLs to be recognised based on expected future reversal of these timing differences.

However, financial statement presentation is not determinative of valuation treatment.

Valuation Treatment: Economic Reality vs Accounting Form

In a valuation context, the relevant question is not whether an item is recognised in the accounts, but whether it is expected to result in real future cash flows that a hypothetical purchaser would reasonably take into account.

Valuation focuses on:

• Expected future cash inflows and outflows
• Risk and probability of those cash flows arising
• The perspective of a hypothetical willing buyer and seller

Accordingly, deferred tax items should only affect value where they are expected to produce real future cash consequences.

Deferred Tax Assets – Recognition of Future Tax Benefits

A Deferred Tax Asset represents a potential future tax saving arising from carried-forward losses or deductible temporary differences.

In valuation practice, Deferred Tax Assets are only recognised where future taxable profits are reasonably expected, because only then will the tax benefit crystallise as a real cash saving.

Where such future savings are expected, they represent future cash inflows which, when discounted to present value, may contribute to the value of an entity.

Why Accounting Symmetry Does Not Imply Valuation Symmetry

Accounting standards require symmetrical presentation of DTAs and DTLs. Valuation does not.

Valuation applies a consistent economic principle:

• Deferred tax assets are reflected where future tax savings are reasonably expected
• Deferred tax liabilities are reflected where future tax payments are reasonably expected (noting that in many cases the underlying tax deduction has already been claimed, and there is no presently enforceable cash tax obligation arising from the accelerated tax deduction).

This ensures valuation reflects economic substance, rather than accounting form alone.

Conclusion

Deferred tax accounting plays an important role in financial reporting. However, business valuation requires an additional step: assessing whether deferred tax balances will result in real future cash flows relevant to a hypothetical purchaser.

Recognising this distinction ensures valuation conclusions reflect economic reality, not purely accounting convention.

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Rushmore Group specialises in forensic accounting, business valuation, and expert valuation reports for commercial, tax, and litigation matters across Australia. Contact us for more information or a confidential discussion.