Dec 182009
FT Alphaville » Basel blows out DTAs.
The Basel committee on banking supervision has ruled deferred tax assets are not part of a bank’s tier one capital that underpins their solvency.
That’s eminently sensible.
What is mad is that they ever were.
2 Responses to “Basel blows out Deferred tax assets”
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Richard
Can you give some more detail to back up your sweeping statement here? I know that you’re not a fan of deferred tax accounting, but what is wrong, in a general sense, of being able to book a DTA in respect of a loss where that DTA will be reversed in a (near) future period? Does it not follow that if a DTA were not booked in respect of a loss then the profit or loss for the period would be understated/overstated for that period. Then when the loss is utilised so that a future tax liability is extinguished in a future period, the profit or loss for that period is overstated/understated by the same amount as in the earlier year.
I am not discussing exotic loss planning here, just normal losses that may be incurred. The effect of ignoring DTAs is to increase volatility for banks – something that we want to avoid at all costs. The policing of whether DTAs can be counted within Tier 1 capital is the job of a beefed up regulator, using an independent expert to test management’s assertions that the DTA is recoverable.
Richard
But banks do not disclose when the DTA is recoverable – they just have think it is – and discounting is not applied
This is living in the land of make believe – as most tax accountants will tell you all deferred tax accounting is. At best it is a black art
And in current environments with losses around are those assets going to be recovered: who knows?
The only rational conclusion is if you want robust banks you exclude assets of dubious worth and uncertain timing as to realisation
Richard