Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm

Deferred tax asset (DTA) is a tax/accounting concept that refers to an asset that may be used to reduce future tax liabilities of the holder. In the banking sector, it usually refers to situations where a bank has either overpaid taxes, paid taxes in advance or has carry-over of losses (the latter b...

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Autores principales:	João Marques Silva, Nuno Souto, José Azevedo Pereira
Formato:	article
Lenguaje:	EN
Publicado:	Taylor & Francis Group 2019
Materias:	valuation deferred tax asset banking sector balance sheet binomial Business HF5001-6182 Management. Industrial management HD28-70
Acceso en línea:	https://doaj.org/article/f80c1e35a95d4e6b831dd2f72cef5c9c
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spelling	oai:doaj.org-article:f80c1e35a95d4e6b831dd2f72cef5c9c2021-12-02T16:09:30ZValuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm2331-197510.1080/23311975.2019.1653543https://doaj.org/article/f80c1e35a95d4e6b831dd2f72cef5c9c2019-01-01T00:00:00Zhttp://dx.doi.org/10.1080/23311975.2019.1653543https://doaj.org/toc/2331-1975Deferred tax asset (DTA) is a tax/accounting concept that refers to an asset that may be used to reduce future tax liabilities of the holder. In the banking sector, it usually refers to situations where a bank has either overpaid taxes, paid taxes in advance or has carry-over of losses (the latter being the most common situation). In fact, accounting and tax losses may be used to shield future profits from taxation, through tax loss carry-forwards. In other words, DTAs are contingent claims, whose underlying assets are banks future profits. Consequently, the correct approach to value such rights implies necessarily, the use of a contingent claims valuation framework. Despite that, one common practice consists in valuing DTAs as though they would be used at 100% without even discounting for the time value of money. Another common procedure consists in considering a subjective “valuation allowance”, valuing the deferred tax asset as a certain percentage of the corresponding maximum value, according to future expectations on the company’s financial performance. The purpose of this paper is exactly to propose a precise and conceptually sound approach to value DTAs. For that purpose, making use of an adapted binomial CRR (Cox, Ross and Rubinstein) algorithm, we derive a precise way to value DTAs. This way, the DTAs are valued in a similar way of the Binomial Options Pricing Model, and the subjectivity of its evaluation is greatly reduced. We will see that with the proposed evaluation techniques, the DTA’s expected value will be much lower than the values normally used in today’s practice, and the bank’s financial analysis will lead to much more sound and realistic results.João Marques SilvaNuno SoutoJosé Azevedo PereiraTaylor & Francis Grouparticlevaluationdeferred tax assetbanking sectorbalance sheetbinomialBusinessHF5001-6182Management. Industrial managementHD28-70ENCogent Business & Management, Vol 6, Iss 1 (2019)
institution	DOAJ
collection	DOAJ
language	EN
topic	valuation deferred tax asset banking sector balance sheet binomial Business HF5001-6182 Management. Industrial management HD28-70
spellingShingle	valuation deferred tax asset banking sector balance sheet binomial Business HF5001-6182 Management. Industrial management HD28-70 João Marques Silva Nuno Souto José Azevedo Pereira Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
description	Deferred tax asset (DTA) is a tax/accounting concept that refers to an asset that may be used to reduce future tax liabilities of the holder. In the banking sector, it usually refers to situations where a bank has either overpaid taxes, paid taxes in advance or has carry-over of losses (the latter being the most common situation). In fact, accounting and tax losses may be used to shield future profits from taxation, through tax loss carry-forwards. In other words, DTAs are contingent claims, whose underlying assets are banks future profits. Consequently, the correct approach to value such rights implies necessarily, the use of a contingent claims valuation framework. Despite that, one common practice consists in valuing DTAs as though they would be used at 100% without even discounting for the time value of money. Another common procedure consists in considering a subjective “valuation allowance”, valuing the deferred tax asset as a certain percentage of the corresponding maximum value, according to future expectations on the company’s financial performance. The purpose of this paper is exactly to propose a precise and conceptually sound approach to value DTAs. For that purpose, making use of an adapted binomial CRR (Cox, Ross and Rubinstein) algorithm, we derive a precise way to value DTAs. This way, the DTAs are valued in a similar way of the Binomial Options Pricing Model, and the subjectivity of its evaluation is greatly reduced. We will see that with the proposed evaluation techniques, the DTA’s expected value will be much lower than the values normally used in today’s practice, and the bank’s financial analysis will lead to much more sound and realistic results.
format	article
author	João Marques Silva Nuno Souto José Azevedo Pereira
author_facet	João Marques Silva Nuno Souto José Azevedo Pereira
author_sort	João Marques Silva
title	Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
title_short	Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
title_full	Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
title_fullStr	Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
title_full_unstemmed	Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm
title_sort	valuation of compounded deferred tax assets for the banking sector, using the binomial crr algorithm
publisher	Taylor & Francis Group
publishDate	2019
url	https://doaj.org/article/f80c1e35a95d4e6b831dd2f72cef5c9c
work_keys_str_mv	AT joaomarquessilva valuationofcompoundeddeferredtaxassetsforthebankingsectorusingthebinomialcrralgorithm AT nunosouto valuationofcompoundeddeferredtaxassetsforthebankingsectorusingthebinomialcrralgorithm AT joseazevedopereira valuationofcompoundeddeferredtaxassetsforthebankingsectorusingthebinomialcrralgorithm
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Valuation of compounded deferred tax assets for the banking sector, using the binomial CRR algorithm

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