Lesson 6 of 6 · 14 min
Tax disclosures and financial analysis
The income tax note breaks pretax income and the tax provision into their parts, reconciles the statutory to the effective rate, and lists every deferred tax item, which lets an analyst judge earnings quality, cash taxes and leverage.
In short
- Tax information appears in the income statement (provision), balance sheet (DTAs, DTLs, taxes payable) and the income tax note, one of the longest notes.
- The note shows pretax income by jurisdiction, the provision split into current and deferred, a rate reconciliation, and the components of DTAs and DTLs including the valuation allowance.
- The rate reconciliation starts from tax at the statutory rate and lists each item that moves it to the actual provision.
- Treat a DTL as debt if it is expected to reverse, as equity if it is not, and exclude it from both when the amount and timing are uncertain.
- Tax loss carryforwards have value to a profitable acquirer: the present value of the tax they save, higher for a higher-rate acquirer.
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