Jan's pills work18 Sep 2020 12:07
I tried one and it was like the 60's again. Everything became clear so before the effect wore off I looked again at impairments again.
Tax losses “live” in a legal entity and so can if that legal entity changes hands, the tax losses are still there and can be used to offset the cash profits that legal entity may make in the future.
The impairments and tax loss de-recognition are really just accounting adjustments we are required to make due to the change in oil price assumptions we now use to calculate our future cash flows.
The impairments represent the write-off of prior period cash capital expenditures. When the present value of future cash flows of an asset does not cover the remaining book value* held on a company’s balance sheet, you need to charge the P&L with that difference. This is effectively accelerated depreciation of an asset.
*Book value is the capital cost spent to develop the asset less the accumulated depreciation of that asset.
From a tax perspective, a company either pays tax or claims tax relief only on its cash profits or losses. As such, a company is able to claim tax credits when it spends the cash to develop an asset (capex) – so in that regard we have already claimed the tax credits for the capital expenditure we have incurred in the past. These tax credits get carried forward if you haven’t actually made a cash profit in the period until such time as you do make a cash profit. At this point you can start to offset your cash profits with prior period cash losses and eliminate any tax liability.
As we now forecast future cash flows to be lower due to lower oil price assumptions (which also drove the above impairments), we will also have lower future potential cash tax liabilities that would need to be offset by the utilisation of our accumulated tax losses. As such, we had to de-recognise from our accounts (from the balance sheet) an element of those accumulated tax losses as they just won’t be used under the current price scenario.
If oil prices increase again in the future, we may be able to “write-back” some of the impairments and so increase our balance sheet value again AND we may be able to recognise additional tax losses that would offset higher expected future cash flows in such an oil price environment. As you go through a given year, if you earn cash profits over and above what you would have expected in that period, you can again utilise some of the overall accumulated tax losses to offset these, even if they were not “accounted for” on your balance sheet (because they were not part of the forecast/scenario used to prepare the relevant accounting entries).
I hope there are no side-effects.
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