Chapter 26Complex Items in Balance Sheet AnalysisDeferred Taxes, Operating Cash, and Derivative Assets

Many balance sheet items can be simulated with the type of process described in Chapter 25 used for accounts payable and have an unambiguous classification in terms of invested capital and enterprise value. The answer for other balance sheet items in terms of classification for invested capital analysis in a financial model is sometimes not as clear. Items discussed in this chapter that are more ambiguous than accounts payable for structuring a financial model include accumulated deferred taxes, operating cash, and derivative assets and liabilities. The treatment of these and other items can be resolved only by understanding the accounting as well as ongoing cash flow implications of the items. An issue related to classification of these assets and liabilities discussed in this chapter is how the various classifications affect the weighted average cost of capital (WACC) calculation.

Treatment of Accumulated Deferred Taxes Arising from Depreciation

Accumulated deferred taxes are a common source of error and confusion when segregating balance sheet items between those related to generation of earnings before interest, taxes, depreciation, and amortization (EBITDA) and those related to costs and income that are not part of EBITDA in a corporate model. Accumulated deferred taxes often appear as a liability on the balance sheet representing the accumulated amount of taxes that ...

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