Converting Operating Taxes to Operating Cash Taxes  421 time, so a deferred-tax asset is created. As a result, for Walmart and for other growing companies in this situation, cash taxes are higher than reported on the income statement. Another operating item, accelerated depreciation, is a deferred-tax liability. It is a liability as a result of Walmart using straight-line depreciation for its finan- cial statements and accelerated depreciation for its tax returns (because larger depreciation expenses lead to lower pretax income and hence smaller taxes). For a growing company, accelerated depreciation is typically larger than straight-line depreciation, so accrual-based taxes typically overstate the actual cash taxes paid. As shown in Exhibit 20.8, operating-related deferred-tax liabilities (such as those associated with accelerated depreciation) should be netted against de- ferred-tax assets (such as those related to accrued liabilities). This reorganization will make the components of operating taxes, the reorganized balance sheet, and ultimately the final valuation more transparent and less prone to error. The remaining items in Exhibit 20.8 are classified as nonoperating. Walmart has three nonoperating deferred-tax accounts: 1. Loss carryforwards net of allowances. When a company loses money, it does not receive a cash reimbursement from the government (as nega- tive taxes in the income statement would imply), but rather an offset toward future taxes. Given that these offsets are unrelated to current profitability, they should be analyzed and valued separately from op- erations. Because most of the offsets are trapped in a particular tax ju- risdiction and unlikely to be realized, we net the valuation allowance against the loss carryforwards. EXHIBIT 20.8  Walmart: Reorganization of Deferred-Tax Accounts $ million 2017 2018 Operating deferred-tax assets (DTAs), net of liabilities (DTLs)   Accrued liabilities 2,482 2,135 Share-based compensation 217 245 Accelerated depreciation (3,954) (4,175) Inventory (1,153) (1,354) Operating DTAs, net of DTLs (2,408) (3,149) Nonoperating deferred-tax assets (DTAs), net of liabilities (DTLs)   Loss and tax credit carryforwards 1,989 2,964 Valuation allowances (1,843) (2,448) Loss carryforwards, net of allowances 146 516 Acquired intangibles (401) (2,099) Other assets net of liabilities 711 232 Nonoperating DTAs, net of DTLs 456 (1,351) DTAs, net of DTLs (1,952) (4,500) 422  Taxes 2. Acquired intangibles. When a company buys another company, such as Walmart’s purchase of Flipkart in 2018, it recognizes intangible assets on its balance sheet for items such as patents and customer lists.4 Since these assets are amortized on the income statement but are not deduct- ible for tax purposes, the company will record a deferred tax liability during the year of the acquisition and then draw down the liability as the intangible amortizes. Since operating taxes (computed in Exhibit 20.6) already exclude the amortization tax benefit in calculating NOPAT, no adjustment is required for deferrals related to these intangible assets. Instead, treat deferred taxes related to amortization of intangibles as nonoperating. 3. Other nonoperating assets net of liabilities. Other examples of nonoperating deferred taxes are deferred taxes related to pensions or convertible debt. Without further disclosure, classifying other accounts is tricky. Since we did not see a consistent pattern in other deferred taxes, we treat them as nonoperating. To convert accrual-based operating taxes into operating cash taxes, add the increase in operating DTAs net of operating DTLs to operating taxes. In most cases, DTLs will exceed DTAs, so this is equivalent to subtracting the increase in operating DTLs net of operating DTAs. For Walmart, net operating DTLs grow from $2,408 million in 2017 to $3,149 million in 2018, an increase of $741 million (see Exhibit 20.8). Subtracting the $741 million from 2018 operating taxes of $4,451 million (computed in Exhibit 20.6) gives $3,710 million of operating cash taxes: $ million 2018 Operating taxes 4,451 Decrease (increase) in net operating DTLs (741) Operating cash taxes 3,710 The operating cash tax rate for 2018 equals operating cash taxes of $3,710 million divided by EBITA of $21,957 million (given in Exhibit 20.6), which equals 16.9 percent. Because of the operating deferrals, operating cash taxes are approximately 17 percent lower than operating taxes on an accrual basis. The operating cash tax rate can be applied to forecasts of EBITA when project- ing future free cash flow. Once the estimation of cash taxes is complete, analyze the results. For instance, a significant portion of the change in operating-related deferred taxes for Walmart was driven by a decline in the accrued liabilities DTA. Ask 4 Under current accounting standards, the premium paid in an acquisition is split between goodwill and other intangible assets (acquired intangibles). Acquired intangibles include identifiable and sepa- rable assets like patents, copyrights, product formulas, and customer lists. Unlike goodwill, acquired intangibles are amortized over their estimated lives.