deferred compensation

[mlh97]

i'm looking at a company with a deferred comp liability and a corresponding investment asset (with a balance very close to the liability.

would you treat it as a component of working capital (for dcf purposes)? since it arises from not paying all of salaries/wages expense out in cash? or, would you treat it as a non-operating asset/liability (and add/subtract it with debt, etc. at the end)? since its generally long term. i could be wrong, but i think there is an interest-bearing component. however, the interest received on the investments should offset any interest expense on the liability. it almost kind of resembles a form of pik notes where the liability increases every year because you don't pay out the necessary cash to make it go down.

as far as how it affects the valuation, it really doesn't, as you would imagine, b/c the increases to the asset and liability will offset one another going forward. this is more of a theory question.

thanks.

 

[Super I]

I'd probably just net or ignore the two.

Do you know how this works? Typically, the company gives you the option to not receive a certain portion of your bonus until some point in the future, and gives you a couple of options on how to invest those dollars. The company sets aside those dollars in the specified investment.

In order for the individual not to be taxed on the income currently, paperwork is signed to make him effectively an unsecured creditor of the company. (This is why specific segregated accounts in the name of the employees can't be set up.) If the company goes bellyup, the employee gets in line. If not, the employee gets his "memo account" value from the investment portfolio (and at that point pays income tax).

In form these are 2 different accounts on the book of the company, but in substance its more of a custodial relationship. I'd net the amounts to effectively "deconsolidate" it from the company's financials.

 

[prockets]

Actually, many companies do not fund their deferred comp liability, it is simply a book reserve type liability that grows with interest, and the amount is subject to insolvency risk regardless of funded or not. There are products out there (e.g. Goldman Sachs actually has a patent on one) which are equity/interest rate swap arrangements to hedge the liability.

 

[mlh97]

i do private company valuations, so i'm not in a position where i could ignore it. therefore, i need to net the two. the question was, would you keep in working capital (ie forecast an increase/decrease each year), including in your calc of fcf, or, would you pull them out entirely and consider them non-operating (like marketable securities/long-term debt). it sounds like you're saying pull them out.