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Grooski on 23 May 2011
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SvennoJ said:
Grooski said:
ithis said:
Grooski said:

Guys, it is not a doom and gloom story. Deferred tax assets. 

Sony has essentially prepaid some of their taxes for the next 3-5 years. Given the PSN and earthquake debacles, its probably the best time for them to do so, that and regulatory requirements require them to.

The underlying result is essentially a 100 billion yen operating profit (around US$1billion) although they didn't quite hit expected revenue and profit levels. As a result market will be slightly down.


You mean they think it's better to pay future taxes now? Why would that be? I mean 100 billion yen profit would have sounded much better to the average person.

They are required to do so under GAAP accounting requirements in the US. It only occurs now because they predict a few years of profit and had a few losses previously.

EDIT from here it seems it is a writeoff of previous years DTA's.

 

  • "Companies are allowed to carry forward tax losses [in japan] for up to seven years if they can show future taxable profits are likely. But three consecutive years of net losses is considered evidence under U.S. accounting rules, the global standard, that those credits may not be available to it.

 

This makes it a non-cash loss and therefore reported as such. If Sony can reach a profit next year, then these credits will be reapplied.

Exactly right. They're not pre-paying their taxes, they're carrying over previous years losses to not pay taxes over current and future profits. It's the same as when you sell your house or stocks as a loss, then you can carry that capital loss over to reduce your capital gains taxes for the next 3 years.

What Does Deferred Tax Asset Mean?
An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be used in future fiscal periods.

Investopedia explains Deferred Tax Asset
It must be determined that there is more than a 50% probability that the company will have positive accounting income in the next fiscal period before the deferred tax asset can be applied.

If, for example, a company has a deferred tax asset of $25,000 on its balance sheet, and then the company earns $75,000 in before-tax accounting income, accounting tax expense will be applied to $50,000 ($75,000 - $25,000), instead of $75,000.

Love that 50% probability limit. Certainty is measured higher than that surely?

Of note is that Sony estimates increases in operating profit for next year but a reduced chance in reaching the offset amount required to claim the credits. That means that fiscally, the earthquake effect is going to last longer than most people thought.