Deferred tax assets (DTAs)

http://www.ft.com/cms/s/1/46206a22-5663-11de-9a1c-00144feabdc0.html

We now know all sorts of nasties lurk on balance sheets. Hitachi shines a light on how some of the more mundane acronyms have become big-ticket writedowns. The Japanese electrical conglomerate last month wrote off $1bn of deferred tax assets, or DTAs, in effect admitting it could not see itself earning enough to be able to cash them in.

DTAs, created by taxable losses and used against future earnings, are familiar territory in Japan. Banks accumulated DTAs in spades after the bubble burst in 1990. They recognised $66bn worth in 1998, or almost a third of shareholders’ equity, which they could count as tier one capital. Like subsequent accounting gerrymandering, such as easing mark-to-market accounting, this concealed damage to capital bases. Since banks appeared relatively healthy, they were eligible recipients of taxpayers’ funds.

Regulators have become more stringent, however, and DTAs now account for a maximum 20 per cent of tier one capital. Last March, banks had $26bn of DTAs, or 13 per cent of tier one capital, although they are now reckoned to be nudging closer to the 20 per cent ceiling.

Banks are not the only DTA hoarders. Manufacturers are close behind. Nomura Securities estimates that non-financials hold a combined $250bn worth, equivalent to 10 per cent of net assets. That is a pretty big chunk, especially as many manufacturers expect more losses this year.

Accounting for DTAs is complex, with different rules depending on expected future profitability, but generally they expire within five years.

Exceptions are those companies posting large losses: do so for three years continuously and DTAs are toast.

Tussles between management and auditors are inevitable. That the latter are claiming more victories for accounting transparency is good, although it does provide another reason to worry about the health of corporate balance sheets.