Simple Valuation of Compounded Deferred Tax Assets Using a Binomial Algorithm

2021 ◽  
pp. 176-197
Author(s):  
Joao Carlos Silva ◽  
Nuno Souto ◽  
José Pereira
Keyword(s):  
Financial Analysis ◽  
Expected Value ◽  
Options Pricing ◽  
Pricing Model ◽  
Deferred Tax Assets ◽  
Carry Over ◽  
Deferred Tax ◽  
Tax Loss ◽  
Evaluation Techniques ◽  
Common Situation

Deferred tax asset (DTA) is a tax/accounting concept that refers to an asset that may be used to reduce future tax liabilities of the holder. In a company's balance, it usually refers to situations where it has either overpaid taxes, paid taxes in advance, or has carry-over of losses (the latter being the most common situation). In fact, accounting and tax losses may be used to shield future profits from taxation, through tax loss carry-forwards. The purpose of this chapter is to propose a precise and conceptually sound approach to value DTAs. For that purpose, making use of an adapted binomial CRR (Cox, Ross, and Rubinstein) algorithm, the authors derive a precise way to value DTAs. This way, the DTAs are valued in a similar way of the binomial options pricing model, and the subjectivity of its evaluation is greatly reduced. The authors show that with the proposed evaluation techniques, the DTA's expected value will be much lower than the values normally used in today's practice, and the bank's financial analysis will lead to much more sound and realistic results.

Valuation of Deferred Tax Assets Using a Closed Form Solution

2021 ◽  
pp. 151-175
Author(s):  
Joao Carlos Silva ◽  
Nuno Souto ◽  
José Pereira
Keyword(s):  
Financial Analysis ◽  
Closed Form Solution ◽  
Form Solution ◽  
Deferred Tax Assets ◽  
Contingent Claim Valuation ◽  
Carry Over ◽  
Deferred Tax ◽  
A Company ◽  
Evaluation Techniques ◽  
Common Situation

Deferred tax asset (DTA) is a tax/accounting concept that refers to an asset that may be used to reduce future tax liabilities of the holder. It usually refers to situations where a company has either overpaid taxes, paid taxes in advance, or has carry-over of losses (the latter being the most common situation). DTAs are thus contingent claims, whose underlying assets are the company's future profits. Consequently, the correct approach to value such rights implies the use of a contingent claim valuation framework. The purpose of this chapter is to propose a precise and conceptually sound mathematical approach to value DTAs, considering future projections of earnings and rates, alongside the DTA's legal time limit. The authors show that with the proposed evaluation techniques, the DTA's expected value will be much lower than the values normally used in today's practice, and the company's financial analysis will lead to much more sound and realistic results.

The Influence of Tax and Nontax Factors on Banks' Choice of Organizational Form

2003 ◽  
Vol 78 (1) ◽  
pp. 297-325 ◽  
Author(s):  
Leslie Hodder ◽  
Mary Lea McAnally ◽  
Connie D. Weaver
Keyword(s):  
Equity Capital ◽  
Income Taxes ◽  
Regulatory Capital ◽  
Strategic Choices ◽  
Deferred Taxes ◽  
Deferred Tax Assets ◽  
State Income ◽  
Deferred Tax ◽  
Tax Loss ◽  
First Time

This paper identifies tax and nontax factors that influence commercial banks' conversion from taxable C-corporation to nontaxable S-corporation from 1997 to 1999, after a 1996 tax-law change allowed banks to convert to S-corporations for the first time. We find that banks are more likely to convert when conversion saves dividend taxes, avoids alternative minimum taxes, and minimizes state income taxes. Banks are less likely to convert when conversion restricts access to equity capital, nullifies corporate tax loss carryforwards, and creates potential penalty taxes on unrealized gains existing at the conversion date. Banks with significant deferred tax assets are less likely to convert, presumably because the write-off of deferred taxes at conversion decreases regulatory capital and exposes the bank to costly regulatory intervention. We also investigate the strategic choices banks make before converting to S-corporations. Converting banks alter their capital structures, deliberately sell appreciated assets, and strategically set dividends to augment net conversion benefits.

UNCERTAINTY IN PRICING TRADABLE OPTIONS

2003 ◽  
Vol 06 (02) ◽  
pp. 103-117 ◽  
Author(s):  
JORGE R. SOBEHART ◽  
SEAN C. KEENAN
Keyword(s):  
Interest Rates ◽  
Market Equilibrium ◽  
Expected Value ◽  
Options Pricing ◽  
Options Market ◽  
Pricing Model ◽  
Random Delays ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Random Fluctuations

In this paper we introduce an options pricing model consistent with the level of uncertainty observed in the options market. By assuming that the price at which an option can be traded is intrinsically uncertain, either because of the inability to hedge continuously or because of errors in the estimation of the security's volatility and interest rates, random delays in the execution of orders or information deficiencies, we show that the Black-Scholes model produces a biased estimate of the expected value of tradable options. Information deficiencies lead to a call-put relationship that reduces to the standard call-put expression on average but shows random fluctuations consistent with the concept of market equilibrium. The same information deficiencies can contribute to the volatility skew that affects the Black-Scholes model.

The Information Content of Tax Loss Carryforwards Before and During the Global Financial Crisis

2018 ◽  
pp. 91-107
Author(s):  
Chytis Evangelos ◽  
Filos Ioannis ◽  
Gkouma Olympia
Keyword(s):  
Financial Crisis ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Telecommunications Industry ◽  
Deferred Tax Assets ◽  
Before And After ◽  
Tax Payments ◽  
Deferred Tax ◽  
The Global Financial Crisis ◽  
Tax Loss

Tax loss carryforwards are a valuable asset because they usually reduce a company's future tax payments. This chapter investigates the importance of deferred tax assets from tax loss carryforwards (DTA_TLC) by sector and index (FTSE/ASE) for the period before and after the outbreak of the financial crisis (2005-2012). In the non-banking industry, the DTA_TLC cover on average half (1/2) of the total deferred tax assets (DTAs) and one-fifth (1/5) of income before taxes (IBT). The telecommunications industry accounts for the largest DTA_TLC components, while the chemicals sector for the smallest. On average, the companies listed in the FTSE/ASE 20 report DTA_TLC five times larger than those of the FTSE/ASE 40. In the banking sector, until 2009 DTA_TLC constituted a small part of total assets and IBT. In contrast, after 2010, DTAs include significant components of DTA_TLC, as a consequence of the private sector involvement (PSI) and the financial crisis.

scholarly journals Earnings Management Through Deferred Taxes Recognized Under IAS 12: Evidence From Pakistan

2014 ◽  
Vol 3 (1) ◽  
pp. 1-19
Author(s):  
Abdul Rafay Abdul Rafay ◽  
Mobeen Ajmal
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Value Relevance ◽  
Relevant Information ◽  
Cash Flows ◽  
Deferred Taxes ◽  
Deferred Tax Assets ◽  
Operational Activities ◽  
Deferred Tax ◽  
Relevant Component

This study examines earnings management through deferred taxes calculated under the IAS 12 and its impact on firm valuation. The literature finds that book–tax nonconformity leads to better earning quality and a greater association between earnings and future expected cash flows. Given that Pakistan is a pioneering implementer of the International Financial Reporting Standards, our hypothesis is that the components of deferred tax disclosed under the IAS 12 provide value-relevant information to equity investors. We divide deferred tax components into three categories: those arising from (i) operational activities, (ii) investing activities, and (iii) financing activities. These are subdivided to ensure that no value-relevant component is aggregated with a nonvalue-relevant component, which might otherwise lead to an information slack. Our sample includes data on shariah-compliant companies listed on the Karachi Meezan Index (KMI-30). We find that deferred tax line items in firms’ balance sheets are reflected in market prices. Investors also tend to treat deferred tax line items (arising from operating, financing, and investing activities) differently. Furthermore, the value relevance is dissimilar for different components of deferred tax. Investors are wary of deferred tax assets and liabilities when pricing and are likely to penalize firms with a higher deferred tax position.

scholarly journals Pengaruh Deferred Tax, Capital Intensity dan Return On Asset terhadap Agresivitas Pajak

2021 ◽  
pp. 160-172
Author(s):  
Angeline Margaretha ◽  
Mila Susanti ◽  
Valentine Siagian
Keyword(s):  
Coal Mining ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Secondary Data ◽  
Capital Intensity ◽  
Multiple Linear Regression Analysis ◽  
Significance Test ◽  
Tax Aggressiveness ◽  
Deferred Tax Assets ◽  
Deferred Tax

This research was conducted to identify the effect of Deferred Tax, Capital Intensity, and Return On Assets on Tax Aggressiveness in the coal mining sub-sector industry. This research uses a quantitative descriptive method. This paper uses secondary data from information that was obtained from the coal mining sub-sector listed on the Indonesia Stock Exchange in 2016-2019. The data collection method used purposive sampling. In this paper, there are several analysis used to process the data, which are, descriptive statistic analysis, correlation coefficient analysis, determination coefficient analysis, multiple linear regression analysis, significance test, and classical assumption test assisted by using Statistical Product and Service Solutions (SPSS) 23. The results of this research prove simultaneously. Deferred Tax Asset, Capital Intensity, and Return On Asset have a significant effect on tax aggressiveness, with the resulting significance value (0.006 <0.05). However, partially deferred tax assets do not have a significant effect on tax aggressiveness (0.365> 0.05), on the other hand, Capital Intensity is significant (0.001 <0.05), and Return On Asset has a negative significance(0.002 <0.05) effect to tax aggressiveness.  Keywords : Deferred Tax Expense, Capital Intensity, Return On Asset, and Tax  Aggressiveness

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