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Write-Ups, D&A & the DTL

Part of the premium writes up PP&E and intangibles. That creates new depreciation/amortization - and a deferred tax liability, because the write-up isn't deductible for taxes.

By the end you can

✓Compute incremental D&A from write-ups
✓Explain why a write-up creates a deferred tax liability

\text{Incremental D\&A} = \frac{\text{Asset Write-Up}}{\text{Useful Life}}

New book depreciation/amortization from the stepped-up asset values.

Worked example · Write up PP&E and intangibles

Given

•: $2,000M
•Allocate 25% to PP&E, 10% to intangibles
•Useful life: 20 years each

Solution

1.PP&E
$25\% \times 2{,}000 = \$500\text{M}$
2.Intangibles
$10\% \times 2{,}000 = \$200\text{M}$
3.Incremental depreciation
$500 / 20 = \$25\text{M}$
4.Incremental amortization
$200 / 20 = \$10\text{M}$
5.Total
$25 + 10 = \$35\text{M / yr}$

Answer

The add $35M of D&A every year - a real drag on earnings.

Deferred Tax Liability (DTL)

The raises book D&A, but the tax authorities don't recognize it - so future cash taxes will exceed book taxes. That timing gap is booked as a DTL = tax rate x write-ups, which unwinds to zero over the assets' lives.

Incremental D&A is the usual culprit in dilution

The new depreciation and amortization reduce pre-tax income year after year. It is one of the most commonly missed - and most - pieces of a .

Check yourself

A $600M write-up is depreciated over 20 years. Annual incremental D&A is: