In loss utilization - carry forward, we can offset current losses against future profits. So what happens in the first year, Year 0. Well, here we've made our loss and we can create the tax credit on the income statements, matched by a deferred tax asset on the balance sheet. So if we look at our balance sheet formulae, assets = liability + equity, we can see deferred tax asset goes up in the asset section and our retained earnings go up, because instead of having a tax expense, we have a tax credit. So that's what happens in Year 0 when we make a loss. Well, it's now Year 1, and in future when we produce profits you can reduce your retained earnings, as you would with any tax expense. But instead of reducing cash, you now reduce your deferred tax asset instead. So here's our balance sheet formula again, and what we see happening is retained earnings go down with the tax expense, but instead of paying cash, your deferred tax asset goes down. Well, what happens in Years 2, 3 or 4 where you gradually run down the deferred tax asset as it is utilized. And we see in the years after the initial loss, ie. Years 1, 2, 3, 4, et cetera, the only effect is on the balance sheet and the cash flow. It's not on the income statement. The only effect we saw on the income statement was in Year 0, when we created that tax credit. A few extra things to remember when carrying forward. Firstly, they can be time-limited. If a company with a deferred tax asset reduces its forecast profits, then it may have to write down the deferred tax asset as it won't get utilized. Remember, finally, a huge deferred tax asset in Year 0, maybe for thousands, and I'm gonna use that against future profits, maybe 100, 100, 100. That's gonna take me 10 years to offset that 1,000s of losses against the 100 of profits every year. If I now reduce those profits to 50, it's now gonna take me 20 years to use up those losses. The second thing is that there is an account impact. Carry forwards can have a big impact on the balance sheet, and cash flows as well. But remember, not the income statements. And lastly, there can be an M&A impact. An acquisition can mean deferred tax assets get used up faster, increasing the value of the target. How does this come about? Imagine I'm going to buy a company and that will give me synergies in my company. Synergies mean my profits go up and thus I can use up a deferred tax asset faster. Instead of spreading a deferred tax asset, maybe over 10 years of future profits, I can maybe now use it up in five years. That means that I'll get cash flows sooner from that deferred tax asset. That's gonna increase the DCF, the discounted cash flow, of my company, increases the value of my company, and means that I will now value that target higher.
