In this model let's see how we will model losses going forward. I can see I've got a company with five years worth of figures and unfortunately in years 1 and 2 it's got a loss before tax of 170. In years 3, 4 and 5 we can see it's got profits. So we want to carry those losses into the future and offset against those profits. So let's start by doing the loss utilization. In year zero we started off with losses of zero. And so my beginning figure in year 1 is also that same zero I linked down to it. I don't need to work out if my losses have gone up. They have, they clearly have we've got 100 just sitting there of losses. But how to model it? I'm going to choose the minus min. I want to use the minimum of -100 and my beginning figure of zero. The minimum of those is clearly the -100. But I then want to flip the sign. So I put that negative sign at the beginning. So that gives me an increase and addition of 100 and my ending losses are 100. Now I can copy that to the right and I can see the next period we start with 100. We then add another 70 of losses. We've got 170 at the end of year 2. Year 3 is where it gets a little bit more interesting. Again, I just copy my figures to the right and I start with the 170, but that gradually gets used up. I've got 50 of profits so I want to use 50 of my losses against those profits. So I will now subtract 50 of those losses away. As I copy into year 4 we've got 100 of profit and 120 of losses. So I can still more than cover those profits. And then lastly, in year 5 we finally get to a big profit number, 200 of profit before tax. I've only got 20 of losses left, so that has now stopped me using my losses and my loss utilization gets back down to zero. Let's see what happens to my taxable income. Well my taxable income, if I take my profit before tax was -100, but then I then add onto that the 100 loss utilization. So my taxable income in year 1 is zero. I won't create any tax from it. My taxes to pay will also be zero cause I take that taxable income, multiply it by the MTR and I'm gonna lock onto that. As I copy that right, I can see that in years 1 to 4 we keep offsetting the profits with losses, but as we go into year 5 something different happens. I had 200 of profit before tax, but only 20 of losses to use against it. That now gives me taxable income of 180 and I pay tax on that. About to realize that if in year zero we had profits then we could maybe have carried some of those year 1 losses back to year zero. But that wasn't the case here.

So we've modeled out loss utilization, it's gone up and down as we've gradually used up those losses. I want to do the same with the deferred tax asset. As you carry forward your losses, until they're fully utilized you should have deferred tax assets. That deferred tax asset is directly linked to those losses. Let's have a look at this section underneath. So my deferred tax asset starts off at zero and I want to ask myself how much does that go up by? Well it goes up by the 100 of losses multiplied by the marginal tax rate. And again, I'm gonna lock onto that marginal tax rate. Give me a figure of 30 and my ending figure is again, 30. If we notice what happens as I gradually copy this to the right, you might notice my losses went up to 170. My deferred tax assets are also going up in this case to 51. As I gradually use up the losses, I use up the losses of 50 in year 3 I start to utilize or use up that deferred tax asset in year 3. Exactly the same in year 4. I use up some of those losses. I use up some of the deferred tax asset. And in year 5 we get our losses down to zero and our deferred tax asset comes down to zero as well.