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Making Deferred Taxes Relevant

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  • Arjan Brouwer
  • Ewout Naarding

Abstract

We analyse the conceptual problems in current accounting for deferred taxes and provide solutions derived from the literature in order to make International Financial Reporting Standards (IFRS) deferred tax numbers value-relevant. In our view, the empirical results concerning the value relevance of deferred taxes should find their way into the accounting standard-setting process. We conclude that deferred taxes should only be recognised for temporary differences that will result in real future tax payments and/or tax receipts. Temporary differences for which the tax cash flow has already occurred have valuation implications for the underlying asset or liability and should, therefore, be accounted for based on the valuation adjustment approach. Furthermore, we conclude that partial allocation should replace comprehensive allocation in order to better align deferred taxes with expected future cash flows and thus increase their relevance and understandability. Finally, we conclude that deferred tax balances should be measured on a discounted basis to address time value.

Suggested Citation

  • Arjan Brouwer & Ewout Naarding, 2018. "Making Deferred Taxes Relevant," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 200-230, May.
    • Handle: RePEc:taf:acceur:v:15:y:2018:i:2:p:200-230
    DOI: 10.1080/17449480.2018.1451903
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    References listed on IDEAS

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    1. Dan S. Dhaliwal & Robert H. Trezevant & Michael S. Wilkins, 2000. "Tests of a Deferred Tax Explanation of the Negative Association between the LIFO Reserve and Firm Value," Contemporary Accounting Research, John Wiley & Sons, vol. 17(1), pages 41-59, March.
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    6. 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, September.
    7. Arjan Brouwer & Martin Hoogendoorn & Ewout Naarding, 2015. "Will the changes proposed to the conceptual framework's definitions and recognition criteria provide a better basis for IASB standard setting?," Accounting and Business Research, Taylor & Francis Journals, vol. 45(5), pages 547-571, August.
    8. Kothari, S. P. & Shanken, Jay, 2003. "Time-series coefficient variation in value-relevance regressions: a discussion of Core, Guay, and Van Buskirk and new evidence," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 69-87, January.
    9. Eli Amir & Theodore Sougiannis, 1999. "Analysts' Interpretation and Investors' Valuation of Tax Carryforwards," Contemporary Accounting Research, John Wiley & Sons, vol. 16(1), pages 1-33, March.
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    11. Graham, John R. & Raedy, Jana S. & Shackelford, Douglas A., 2012. "Research in accounting for income taxes," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 412-434.
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    Cited by:

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    3. Ângela Pereira & Cláudia Pereira & Luís Gomes & Armindo Lima, 2023. "Do Taxes Still Affect Earning Persistence?," Administrative Sciences, MDPI, vol. 13(2), pages 1-13, February.

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