Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
The prior year adjustments appear to show that Tesco has overestimated its tax
liability in the last two years. It has therefore reduced subsequent estimates and
hence the effective rate in the current year. Also note the unrecognised deferred
taxation asset – these can only be recognised where recoverability is effectively
guaranteed.
Exhibit 4.14: Deferred taxation note
Deferred taxation
Amount provided
2003 2002
£m £m
Excess capital allowances over depreciation 526 432
Other timing differences (14) 8
Losses carried forward (7) –
505 440
Source: Tesco Plc Annual Report and Financial Statements 2003
This note explains the source of the deferred taxation numbers. These relate to
historic capital allowances (also known as tax depreciation) being in excess of
accounting depreciation. This will mean that, in the future the tax to pay will be
higher as much of the tax benefit is exhausted.
3.6 Building valuation models: What to do
Deferred tax represents a significant problem both when modelling company
accounts and when converting those forecasts into a valuation. We shall take the
two separately. From inside the company – or if it provides adequate information
– it is possible to calculate future deferred tax provisions or reversal of provisions
in the fashion illustrated above. But what happens if we do not have this
information?
In most cases it is not plausible to try to model on an asset by asset basis. Instead,
it may be reasonable to look at the history of the company’s tax charges over the
past few years. In a simple case, if the company is mature, but still growing
slowly, there may be a reasonable proportion of its annual tax charge that may be
assumed to accrue as deferred tax each year and never to be paid, because as the
company continues to grow, it continues each year to create capital allowances in
excess of its depreciation charges.
Even in the case of growing companies it cannot necessarily be assumed that
deferred taxation provisions will not reverse. If capital expenditure is switched
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