Rite Aid Deferred-Tax Charge May Hit $1B

The company's valuation of deferred tax assets was not up to the strict standards of FAS 109.
Stephen TaubMarch 17, 2008

Rite Aid Corp. said it will record a non-cash accounting charge of between $800 million and $1 billion for its fourth quarter ended March 1, 2008, related to a valuation allowance on deferred tax assets.

The charge is being taken in order comply with Financial Accounting Standard 109.

The valuation allowance, to be reflected as a reduction of Rite Aid’s deferred tax assets, relates to the U.S. GAAP requirements for companies that have a cumulative pre-tax loss in recent years, the drugstore giant said in a press release.

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The company expects to be able to use its deferred tax assets when it generates pre-tax profits in the future.

The non-cash accounting charge has no impact on the company’s revenues, adjusted EBITDA, or liquidity, but will negatively affect its net loss and loss per diluted share for fiscal 2008.

Rite Aid noted that the exact amount of the non-cash tax charge has not been finalized given the technical nature of the U.S. GAAP accounting requirements.

Valuation allowances stem from reported net operating losses (NOLs), which are created when expenses outstrip revenues in a given period. NOLs, in turn, allow companies to take tax deductions to offset future income — or a tax credit to apply against past tax payments.

But to record one of these tax benefits, the deduction must meet the strict requirements of FAS 109.

For example, under FAS 109, a company can garner a tax deduction if it’s more likely than not (management is more than 50 percent sure) that the company will have the ability to generate income during the carry-forward period when the losses will be netted. That means, if a corporation has reported recent losses, it becomes “virtually impossible” for management to be certain they can book the tax benefit, explains tax expert Robert Willens.