Deferred Taxes on the Reorganized Balance Sheet  423
yourself if the decline is sustainable or perhaps the result of a one-time reduc-
tion in benefits, such as new limitations on accrued vacation. Include only on-
going, operating-related differences in your forecast cash taxes and ultimately 
free cash flow.
Deferred Taxes on the Reorganized Balance Sheet
One critical component of a well-structured valuation model is a properly 
reorganized balance sheet. As outlined in Chapter 11, the accounting balance 
sheet is reorganized into invested capital, nonoperating items, and sources 
of financing. Since operating DTAs and DTLs flow through NOPAT via cash 
taxes, they are considered equity equivalents. Why equity? When we convert 
accrual taxes to cash taxes, income is adjusted, and the difference becomes 
part of retained earnings, making it an equity equivalent. As discussed in 
Chapter 11, equity equivalents are not part of invested capital. If operating 
DTAs and DTLs were mistakenly included as part of invested capital, they 
could be double-counted in free cash flow: once in NOPAT via cash taxes and 
again when taking the change in invested capital.
Exhibit 20.9 presents a reorganized balance sheet that includes the de-
ferred-tax items from Exhibit 20.8. Equity equivalents, which appear in the 
equity section of total funds invested (the right side of Exhibit 20.9), include 
all deferred-tax accounts, except for loss carryforwards and nondeductible 
intangibles, which appear elsewhere. In 2018, Walmart’s equity equivalents 
equaled $2,917 million. This amount consists of negative $3,149 million in op-
erating DTAs net of DTLs, plus $232 million from other DTAs net of other 
DTLs. Because we record the result in the equity section (and not as an asset), 
we reverse the sign.
EXHIBIT 20.9  Walmart: Treatment of Deferred Taxes on the Reorganized Balance Sheet
$ million
 
2017
2018
2017
2018
Total funds invested: Uses
Total funds invested: Sources
Working capital
(9,195)
(7,750)
Short-term borrowing
5,257
5,225
Property, plant, and equipment
114,818
111,395
Debt due within one year
4,405
2,605
Other assets, net of liabilities
5,396
7,341
Long-term debt
36,825
50,203
Invested capital, excluding intangibles
111,019
110,986
Debt and debt equivalents
46,487
58,033
Acquired intangibles
18,242
31,181
Deferred-tax liabilities, net1
1,697
2,917
Less: Nondeductible intangibles
(401)
(2,099)
Noncontrolling interest
2,953
7,138
Acquired intangibles, net of gross-up
17,841
29,082
Walmart shareholders’ equity
77,869
72,496
Equity and equity equivalents
82,519
82,551
Invested capital, including intangibles
128,860
140,068
Tax loss carryforwards
146
516
Total funds invested
129,006
140,584
Total funds invested
129,006
140,584
1 Deferred-tax liabilities (net of assets), excluding tax loss carryforwards and deferred taxes related to acquired intangibles.

424  Taxes
Two nonoperating deferred-tax accounts will not be classified as equity 
equivalents: tax loss carryforwards and deferred taxes related to acquired in-
tangibles. The DTA for tax loss carryforwards ($516 million in 2018) shows up 
as a nonoperating asset and should be valued separately. The deferred-tax li-
ability related to the acquired intangibles ($2,099 million) is treated as an offset 
to the intangible asset itself, since the asset was grossed up for nondeductible 
amortization when the asset was created.
Why deduct deferred taxes for intangible assets from acquired intangibles? 
When a company buys another company, it typically recognizes as intangible 
assets those intangibles that are separable and identifiable (such as patents). 
These intangible assets are amortized over their estimated life on the GAAP 
income statement. But since, in most countries, the amortization is not deduct-
ible for tax purposes, a mismatch will occur. As a result, the company creates a 
deferred-tax liability when it makes the acquisition. To keep the balance sheet 
balanced, the company also increases intangible assets (known in accounting 
as “grossing up”) by the size of the new DTL. Since the grossed-up intangible 
and DTL are purely accounting conventions and do not reflect cash transac-
tions, they should be eliminated from the analysis of intangible assets and 
deferred taxes.
To apply this offset for 2018 in Exhibit 20.9, we subtract the deferred-tax li-
ability of $2,099 million from acquired intangibles of $31,181 million. As shown 
with the uses of funds on the left side the exhibit, this results in adjusted in-
tangibles of $29,082 million. By calculating taxes on EBITA and subtracting the 
DTL from acquired intangibles, we have essentially converted accrual taxes to 
the cash taxes actually paid.
Finding Deferred Taxes on the Balance Sheet
One practical difficulty with DTAs and DTLs is finding them. Sometimes they 
are explicitly listed on the balance sheet, but often they are embedded within 
other assets and other liabilities. Check the tax footnote for embedded items. 
For instance, in the notes to its 2018 annual report, Walmart discloses that it 
embeds $1,796 million in deferred-tax assets in “other long-term assets.”
Valuing Deferred Taxes
As noted in the previous section, any deferred-tax assets and liabilities clas-
sified as operating are incorporated into operating cash taxes. As such, they 
flow through NOPAT and free cash flow, so they are already embedded in 
the value of operations. In contrast, the valuation process for nonoperating 
deferred taxes depends on the particulars of the account.
The valuation of tax loss carryforwards depends on the information 
provided. If details are elusive, apply the reported valuation allowance