Net operating loss
AccountingA loss computed under the tax rules that a company can carry forward to reduce the tax payable on future profits.
Also written: NOL, tax loss carried forward, loss carryforward, tax losses
A net operating loss is a tax concept, not an accounting one, so it rarely equals the loss in the accounts: different depreciation, disallowed expenses and timing differences all drive a wedge between the two. The term is American, and European practice says tax losses or losses carried forward, but the mechanics are the same and both labels get used in the same meeting.
The value of a loss is the cash tax it saves, not its own size. Losses of 300 in a country taxing at 25% are worth at most 75, and that 75 only arrives as future profits arise to absorb them. Spread across ten years and discounted, it is worth considerably less than 75 today.
It appears in the accounts as a deferred tax asset, but only to the extent that future taxable profit is probable. A company with a history of losses often carries little or none of it, which means the balance sheet figure is a judgement about the future rather than a measure of the relief available.
In an acquisition the losses are an attribute of the entity, so they stay inside the company in a share deal and stay behind with the seller in an asset deal. Whether they survive the change of ownership depends on national anti loss trafficking rules, which is why a buyer should never assume it inherits the benefit.
Worked example
A target has 300 of accumulated losses in a 25% jurisdiction, so a maximum benefit of 75.
The buyer expects 30 of taxable profit a year and can shelter all of it, so 7.5 of cash tax saved a year for ten years, worth roughly 50 today at an 8% discount rate.
Add a restriction that halves the annual use and the same 75 arrives across twenty years instead, worth roughly 37 today. Nothing about the loss balance changed, only the speed at which it can be used.