Mikemayo
Mike Mayo Takes on Citigroup Mike Mayo, an influential analyst with a history of being controversial believes that Citigroup (Citi) is too aggressive in its accounting for deferred tax assets, and should take a write down against them because the firm has operated unprofitably for three consecutive years. A Deferred Tax Asset (DTA) is an asset on the balance sheet that may be used to reduce income tax in a future period. DTAs result from net operating losses and timing differences, but can only be recorded if it is determined that there is more than a 50 percent probability that the company will have future income sufficient to realize the value (Srinivasan and Kaser 2012). The write down, or valuation allowance, would be a signal of poor expected future performance and would wreak havoc on Citi’s stock. Mike Mayo is incorrect in his assessment of Citigroup’s accounting for deferred tax assets because Citi has high likelihood of future profitability, within the time constraints for realization, and substantial capital to meet the regulatory capital requirements.
Let’s Face it, Everyone Gets it Wrong Mayo asserts that Citigroup must record a valuation allowance because the firm has not been profitable for three consecutive years. SFAS 109, the guiding accounting principle for DTAs, suggests that the firm must have the ability to earn taxable profits and realize tax benefits in future years (Srinivasan and Kaser 2012). The guidance does not give a time constraint, but acknowledges that cumulative losses in recent years are reason enough to take a write down. The time frame allowed to carry-forward a net operating loss is 20 years. Approximately $17 billion of Citigroup 's DTA is represented by tax return carry-forwards set to expire beginning in 2017 and continuing through 2028. This amount of time provides enough time to utilize the DTAs pertaining to NOLs and NOLs that would be created by the reversal of the future net deductions, which have not yet
Let’s Face it, Everyone Gets it Wrong Mayo asserts that Citigroup must record a valuation allowance because the firm has not been profitable for three consecutive years. SFAS 109, the guiding accounting principle for DTAs, suggests that the firm must have the ability to earn taxable profits and realize tax benefits in future years (Srinivasan and Kaser 2012). The guidance does not give a time constraint, but acknowledges that cumulative losses in recent years are reason enough to take a write down. The time frame allowed to carry-forward a net operating loss is 20 years. Approximately $17 billion of Citigroup 's DTA is represented by tax return carry-forwards set to expire beginning in 2017 and continuing through 2028. This amount of time provides enough time to utilize the DTAs pertaining to NOLs and NOLs that would be created by the reversal of the future net deductions, which have not yet
References: Srinivasan, S., and A. Kaser. (2012). Mike Mayo Takes on Citigroup. (Case No. 9-112-025). Boston, MA: Harvard Business School Publishing.