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Changes in Unrecognised Deferred Tax Accruals from Carry-Forward Losses: Earnings Management or Signalling?


  • Kathleen Herbohn
  • Irene Tutticci
  • Pui See Khor


This paper examines how managers elect to use their discretion over the amount of unrecognised tax assets from carry-forward losses that is available under the income statement method specified in "AASB1020" 'Accounting for Income Taxes'. Specifically, we consider whether changes in the amount of unrecognised deferred tax assets from carry-forward losses, reflect managers' incentives to opportunistically manage earnings, or communicate private information about future profitability (i.e., signalling). Using data from firms listed on the Australian Stock Exchange during the period 1999 to 2005, we find evidence consistent with income-increasing earnings management when pre-tax earnings are below the median analyst forecast. Interestingly, we find that the potential existence of earnings management does not reduce the capacity of changes in unrecognised deferred tax assets from carry-forward losses to predict one-year-ahead performance, and to a much lesser extent, three-year ahead performance. This result highlights the complexity of managers' incentives in trading-off between managing earnings toward a desired target and communicating useful information to market participants. Copyright (c) 2010 Blackwell Publishing Ltd.

Suggested Citation

  • Kathleen Herbohn & Irene Tutticci & Pui See Khor, 2010. "Changes in Unrecognised Deferred Tax Accruals from Carry-Forward Losses: Earnings Management or Signalling?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 763-791.
  • Handle: RePEc:bla:jbfnac:v:37:y:2010-07:i:7-8:p:763-791

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    References listed on IDEAS

    1. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    2. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
    3. David B. Citron, 2001. "The Valuation of Deferred Taxation: Evidence from the UK Partial Provision Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7&8), pages 821-852.
    4. Cheryl Chang & Kathleen Herbohn & Irene Tutticci, 2009. "Market's perception of deferred tax accruals," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(4), pages 645-673.
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    Cited by:

    1. Dreher, Sandra & Eichfelder, Sebastian & Noth, Felix, 2017. "Predicting earnings and cash flows: The information content of losses and tax loss carryforwards," IWH Discussion Papers 30/2017, Halle Institute for Economic Research (IWH).
    2. Mark Wilson, 2011. "Earnings Management in Australian Corporations," Australian Accounting Review, CPA Australia, vol. 21(3), pages 205-221, September.
    3. Wei Jiang & Meiting Lu & Yaowen Shan & Tingting Zhu, 2016. "Evidence of Avoiding Working Capital Deficits in Australia," Australian Accounting Review, CPA Australia, vol. 26(1), pages 107-118, March.
    4. Wessel M. Badenhorst & Petri H. Ferreira, 2016. "The Financial Crisis and the Value-relevance of Recognised Deferred Tax Assets," Australian Accounting Review, CPA Australia, vol. 26(3), pages 291-300, September.
    5. Flagmeier, Vanessa & Müller, Jens, 2016. "Tax loss carryforward disclosure and uncertainty," arqus Discussion Papers in Quantitative Tax Research 208, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Flagmeier, Vanessa, 2017. "The information content of tax loss carryforwards: IAS 12 vs. valuation allowance," arqus Discussion Papers in Quantitative Tax Research 216, arqus - Arbeitskreis Quantitative Steuerlehre.

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