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When a liability becomes an asset

Published: 
Sunday, March 12, 2017

Our engineer Finance Minister, Colm Imbert, ignited a firestorm when he accused the last government of attempting to hide the losses of Petrotrin, which are really some $4.2billion (TT) between 2011 and 2016, since to him it should have been explicitly shown in Petrotrin’s books. This brought an immediate response, condemnation, from the big guns of the current Opposition who claim that indeed there is this loss as the minister claims.

However, according to accepted accounting practise, if the company is in a position to make a profit in the future, this loss can then be used to offset its future tax burden. Hence, by the stroke of the accountant’s pen this accrued loss disappears from or is not recorded on the profit and loss statement and appears on the balance sheet as an ‘asset’; as a deferred tax asset.

The accounting literature indeed talks about such a deferred asset, eg, a capital allowance, which appears on the balance sheet to offset future taxes.

This being so, the defenders of Petrotrin’s accounts see the minister’s accusation as challenging the integrity of the accounting firm and possibly an ulterior move meant to result in the privatisation of Petrotrin. Let us ignore for a moment the conventions of the accounting profession and look at the reality.

If a company loses money in a particular year then it had to fund this loss by something; debt, overdraft or even its own resources or whatever. Hence the company would have incurred a capital liability because of the loss.

The tax laws of this land allow a company to relate its poor performance in one year to its tax requirement in future years if it has made a loss. In other words, the tax burden on a company can span its aggregate performance over one or more years if losses have been incurred.

What the accountants attempt to do is to record on the balance sheet the losses accrued that can be used in future years to offset taxes if and when profits are made. This record they call a deferred tax asset (may as well have called it accrued losses or an elephant—what is in a name).

Still these deferred tax assets cannot be seen in the same light as plant and equipment (tangible assets) or intellectual property assets. The Dodd Frank Regulations in the USA after 2009 frowned on practices such as these.

In this way, the balance sheets of consecutive years are linked via the deferred tax asset as to the accrued losses or capital allowances that can be carried across the years for tax purposes. But what is real is that the company lost money in a particular year or years and this cannot be transformed into a traditional asset by the stroke of an accountant’s pen.

According to accounting practices, the loss for a particular year appears on that year’s profit and loss statement. However, the accrued losses over the years, which allow future tax relief, are indicated in the deferred asset and also as capital liabilities in the balance sheet.

The minister may not have been concerned with these accounting subtleties and was focusing on the capital implications of the accrued debt/losses of the company, which are of acute importance to the shareholder, the corporation sole.

Mary K King

St Augustine