Forecasting deferred taxes

[mlh97]

So I'm trying to forecast a balance sheet. The drivers for all of the balances are pretty apparent, but I can't seem to figure out what I should use as my driver for deferred taxes. the balance has been fairly flat over the previous four years, a little up and down. is it appropriate to keep in the same, assume no change in the balance at all? or should i just make it a percent of revenues?

thanks.

 

[CFAMontreal]

maybe you can build in your model the income statement for tax purposes, using different assumptions and accounting estimates (e.g.: depreciation and whatever is allowed to do in income tax reporting)...and then you will get your deferred tax estimates. However, of course I don't know all details of your case, but I would exclude deferred tax from projected balance sheet. I don't think that it might affect your valuations significantly. Deferred taxes is more the matter of stretching tax payment policies. Payables and receivables are easier to forecast as those estimates stem from company's operations+payment policies.

I'm not sure whether I was clear, but I'd do exclude deferred taxes assets/liabilities.

 

[mlh97]

so are you saying to make it go away for purposes of making my balance sheet balance, i need to plug it to equity? add debt? am i missing something?

 

[CFAMontreal]

I would put that amount of deferred tax assets/liabilities in income statement as "other income/losses" and forget about it...

well, it is quite tricky overall and difficult to think about this on Friday, at the end of the day...let's see what others will say.

Have a nice weekend!

 

[Super I]

My first question would be, what is creating deferred taxes?

Let's say it's coming primarily from differences between book and tax depreciation. If fixed asset levels are expected to remain fairly stable, ie replacement of fully depreciated assets but no real net new increase, then keeping deferred taxes level will probably not materially misstate them. If PP&E are going up, then your deferred taxes are likely to increase too, and you might be able to get away with a growth rate that mirrors fixed asset growth.

I can't gve much guidance beyond this without knowing the approach that you're uisng to calculate all of the other numbers. I'm assuming that you are also projecting an abbreviated income statement for each period forecast so that you can project retained earnings. This would mean that you are forecasting income tax expense. The offset to that entry is going to be split between income taxes payable (short term payables) and deferred taxes. So as long as you make sure that the net affect on ST payables (portion related to taxes) plus change in deferred taxes equals tax expense, your balance sheet will balance. If you put more into current liabilities than into deferred its being a bit more conservative since it lowers working capital and liquidity ratios.

Hope this helps.