Valuation of the Firm in the Presence of Temporary Book-Tax Differences: The Role of Deferred Tax Assets and Liabilities

2000 ◽  
Vol 75 (1) ◽  
pp. 1-12 ◽  
Author(s):  
David A. Guenther ◽  
Richard C. Sansing
Keyword(s):  
Financial Reporting ◽  
Market Value ◽  
Cash Flows ◽  
Present Value ◽  
Deferred Tax Assets ◽  
Tax Deductions ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Future Cash Flows

This study uses an analytical model to investigate the value of the firm when there are temporary differences between when revenue and expense items are recognized for tax- and financial-reporting purposes. The model shows that deferred tax assets and liabilities transform book values of underlying liabilities and assets into estimates of the after-tax cash flows on which the firm's market value is based. The analysis shows that if tax deductions are taken on a cash basis, and if the underlying assets and liabilities are recorded at the present value of their associated future cash flows, then the value of deferred tax assets and deferred tax liabilities is their recorded amount, regardless of when the asset will be realized or when the liability will reverse. If tax deductions are not taken when the expenditure is made (e.g., depreciation) or if underlying assets and liabilities are recorded at more than the present value of their associated future cash flows (e.g., warranty liabilities), then the market value of deferred tax assets and deferred tax liabilities is less than their recorded values. The value of the deferred tax account is independent of when that account will reverse.

The Valuation Relevance of Reversing Deferred Tax Liabilities

2004 ◽  
Vol 79 (2) ◽  
pp. 437-451 ◽  
Author(s):  
David A. Guenther ◽  
Richard C. Sansing
Keyword(s):  
Discount Rate ◽  
Firm Value ◽  
Market Value ◽  
Present Value ◽  
Depreciation Rate ◽  
The Future ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Tax Depreciation ◽  
Depreciation Methods

This paper compares two attributes of a deferred tax liability (DTL) that arise from differences in book and tax depreciation methods. The first attribute is the effect of the DTL on the market value of the firm. The second is the length of time between when the asset is placed into service and when the DTL associated with that asset begins to reverse. The paper shows that a decrease in the time it takes for the DTL to begin to reverse is neither necessary nor sufficient for the value of the DTL to increase. It also shows that the value of the DTL is not equal to the present value of the future deferred tax expense. The effect of one dollar of DTL on firm value depends only on the tax depreciation rate and the discount rate.

scholarly journals Earnings Management Through Deferred Taxes Recognized Under IAS 12: Evidence From Pakistan

2014 ◽  
Vol 3 (1) ◽  
pp. 1-19
Author(s):  
Abdul Rafay Abdul Rafay ◽  
Mobeen Ajmal
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Value Relevance ◽  
Relevant Information ◽  
Cash Flows ◽  
Deferred Taxes ◽  
Deferred Tax Assets ◽  
Operational Activities ◽  
Deferred Tax ◽  
Relevant Component

This study examines earnings management through deferred taxes calculated under the IAS 12 and its impact on firm valuation. The literature finds that book–tax nonconformity leads to better earning quality and a greater association between earnings and future expected cash flows. Given that Pakistan is a pioneering implementer of the International Financial Reporting Standards, our hypothesis is that the components of deferred tax disclosed under the IAS 12 provide value-relevant information to equity investors. We divide deferred tax components into three categories: those arising from (i) operational activities, (ii) investing activities, and (iii) financing activities. These are subdivided to ensure that no value-relevant component is aggregated with a nonvalue-relevant component, which might otherwise lead to an information slack. Our sample includes data on shariah-compliant companies listed on the Karachi Meezan Index (KMI-30). We find that deferred tax line items in firms’ balance sheets are reflected in market prices. Investors also tend to treat deferred tax line items (arising from operating, financing, and investing activities) differently. Furthermore, the value relevance is dissimilar for different components of deferred tax. Investors are wary of deferred tax assets and liabilities when pricing and are likely to penalize firms with a higher deferred tax position.

scholarly journals DEFERRED INCOME TAX: IMPACT ON FINANCIAL AND TAX REPORTING (THE PRACTIСE OF UKRAINE AND GERMANY)

2021 ◽  
Vol 4 (39) ◽  
pp. 138-148
Author(s):  
O. Malyshkin ◽  
S. Rohoznyi ◽  
O. Yarmolitska ◽  
Yu. Ostapenko
Keyword(s):  
Financial Reporting ◽  
Income Tax ◽  
Jel Classification ◽  
International Standards ◽  
Tax Base ◽  
Deferred Tax Assets ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Tax Reporting ◽  
The Impact

Abstract. Income taxation is typical for most countries with their own peculiarities. In the practice of the Ukrainian enterprises, there is a lack of relationship between accounting and tax accounting to reflect the deferred tax asset and deferred tax liability in the reporting. The purpose of the article is to analyze the income tax in terms of its calculation by the international standards and identify key tax differences. The authors proposed to formulate the definitions of the current income tax which should be understood as the amount of income taxes payable (reimbursed) on taxable profit (tax loss) for the period and expenses (income) from income tax which should be understood as the total amount included in the determination of profit or loss for the period in accordance with current and deferred taxes. This interpretation of the definitions will help better understand the concepts in accounting and taxation. The tax base of assets and the tax base of liabilities are given and substantiated. The temporary differences were identified by authors. The example of definition of Deferred tax liabilities and Deferred tax assets, the order of their reflection in the report on financial results (about the total income) and disclosure in the Notes to the financial reporting is considered and analyzed. The impact on the indicators of the Income Tax Return is investigated. There is no direct impact of the amount of the Deferred tax assets / Deferred tax liabilities according to the current algorithm for the object of taxation, which is determined by tax legislation. The conclusions are made about the importance of determining of Deferred tax liabilities and Deferred tax assets, which directly affects the amount of net profit. The result of the study was confirmation of the hypothesis concerning different orientation of norms of the legal documents on the display of information in the forms of the financial and tax reporting. Such differences are related to the different requirement to the reporting by the modern stakeholders. Keywords: income tax, deferred tax, tax asset, tax liability, reporting. JEL Classification M40, М41, М48 Formulas: 0; fig.: 2; tabl.: 5; bibl.: 16.

Audit Firms, Deferred Taxation and Financial Reporting

2016 ◽  
Vol 3 (1) ◽  
pp. 1-21 ◽  
Author(s):  
Evangelos Chytis ◽  
John Filos ◽  
Periklis Tagkas ◽  
Maria Rodosthenous
Keyword(s):  
Financial Reporting ◽  
Banking Sector ◽  
Stock Exchange ◽  
Balance Sheets ◽  
Deferred Tax Assets ◽  
Audit Firms ◽  
Athens Stock Exchange ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Audit Reports

The purpose of this paper is the sectoral analysis and evaluation of the external audit reports in relation to the amounts of deferred taxes on the balance sheets of listed companies in the Athens Stock Exchange (ASE). External auditors participate significantly in the preparation of financial reporting, reducing agency problems and aiding acceptance of such information by the users as reliable. The “unqualified” audit reports correspond to more than two thirds of the total, while in the banking sector there is no “unqualified” (ie without even issue of ‘emphasis') Audit Report after 2011. More than two thirds of Deferred Tax Assets - including those from Loss Carryforwards - (DTA), Deferred Tax Liabilities (DTL), and Deferred Tax in the Income Statement appear on the Balance Sheets of the companies audited by the Big 5. Audit firms and supervisory authorities do not seem to have made satisfactory evaluation and exploitation of this information.

scholarly journals Financial reporting on income tax in Serbia and Croatia: An empirical analysis

2020 ◽  
Vol 68 (5-6) ◽  
pp. 330-340
Author(s):  
Stefan Vržina ◽  
Vladimir Obradović ◽  
Jasmina Bogićević
Keyword(s):  
Financial Reporting ◽  
Income Tax ◽  
Deferred Tax Assets ◽  
Reporting Practices ◽  
Economic Decision Making ◽  
National Environment ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Relevant Regulation

The paper examines the quality of financial reporting on income tax in Serbia and Croatia in order to determine the extent to which disclosed information on income tax in these countries is useful for economic decision making. The research based on financial statements of listed and non-listed companies for 2016 reveals that disclosed information on the income tax is not entirely in accordance with the relevant regulation. Therefore, there is a significant room for improvement of income tax financial reporting practices in both countries. The quality of disclosed income tax information is not related to the presence of companies in the stock market, as capital markets in Serbia and Croatia do not provide strong incentives for disclosing adequate information on income tax. The research also reveals significant differences in the prevailing sources of deferred tax assets and deferred tax liabilities between Serbia and Croatia, which indicates that the income tax financial reporting is conditioned by the specifics of the national environment.

Are CFOs Effective Operators? An Empirical Analysis of CFO/COO Duality

2018 ◽  
Vol 31 (2) ◽  
pp. 37-58 ◽  
Author(s):  
Steve Buchheit ◽  
Austin L. Reitenga ◽  
George Ruch ◽  
Daniel A. Street
Keyword(s):  
Empirical Analysis ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Financial Reporting Quality ◽  
Chief Financial Officer ◽  
Sample Period ◽  
Future Cash Flows

ABSTRACT While the popular press has documented Chief Financial Officer (CFO) role expansion into traditional operations functions, recent research suggests that time spent on non-core CFO activities harms financial reporting quality. We examine the operational acumen of CFOs and potential negative reporting consequences stemming from one person simultaneously holding the role of CFO and Chief Operations Officer (COO) (CFO/COO duality). Empirically, CFO/COO duality occurs with increasing frequency during our sample period (2000–2016); duality is not uncommon (among firms with a COO, over 10 percent have a unified CFO/COO executive). We find no evidence that combining the CFO and COO positions adversely affects operations. Regarding financial reporting quality, we find some evidence that CFO/COO duality firms have relatively more volatile discretionary accruals; however, these accruals are also relatively more predictive of future cash flows. Collectively, our results suggest that unifying control of operations and reporting can be an effective corporate reconfiguration.

scholarly journals The Predictive Ability of Quarterly Financial Statements

2021 ◽  
Vol 9 (3) ◽  
pp. 50
Author(s):  
Hui Zhou ◽  
Worapree Ole Maneesoonthorn ◽  
Xiangjin Bruce Chen
Keyword(s):  
Financial Reporting ◽  
Predictive Ability ◽  
Financial Statements ◽  
Cash Flows ◽  
Policy Implications ◽  
Quarterly Data ◽  
Time Series Modelling ◽  
Modelling Techniques ◽  
Future Cash Flows

A fundamental role of financial reporting is to provide information useful in forecasting future cash flows. Applying up-to-date time series modelling techniques, this study provides direct evidence on the usefulness of quarterly data in predicting future operating cash flows. Moreover, we show that the predictive gain from using quarterly data is larger for asset-heavy industries and industries with higher levels of earnings smoothness. This study contributes to the accounting literature by examining the usefulness of quarterly financial statements in predicting the realization of future cash flows. Our results help fill the gap in knowledge on quarterly financial statements and provide new insights on why the frequency of financial reporting matters. In addition, our findings have important policy implications for the ongoing debate over interim reporting requirements in multiple jurisdictions around the world.

Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

2018 ◽  
Vol 33 (1) ◽  
pp. 39-59
Author(s):  
Jimmy F. Downes ◽  
Tony Kang ◽  
Sohyung Kim ◽  
Cheol Lee
Keyword(s):  
Financial Reporting ◽  
Cash Flows ◽  
Data Availability ◽  
The European Union ◽  
Accounting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Accounting Estimates ◽  
Accounting Accruals ◽  
Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

scholarly journals Do Big 4 auditors improve the ability of goodwill to forecast future cash flows?

2016 ◽  
Vol 13 (3) ◽  
pp. 164-172 ◽  
Author(s):  
Ahmad Al-Hiyari ◽  
Rohaida Abdul Latif ◽  
Noor Afza Amran
Keyword(s):  
Financial Reporting ◽  
Predictive Ability ◽  
Cash Flows ◽  
Reporting Standard ◽  
Accounting Firms ◽  
Big 4 ◽  
Business Combination ◽  
Accounting Rules ◽  
Future Cash Flows ◽  
Professional Judgement

The accounting rules prescribed in Malaysian Financial Reporting Standard (MFRS) 3, Business combination, and (MFRS) 136, Impairment of Assets, give managers considerable reporting discretion in allocating goodwill and estimating its actual value. Agency theory predicts that managers may use the accounting discretion granted by the new rules to pursue their own interests at the expense of shareholders. Hence, auditors are required to exercise professional judgement when investigating hard-to-verify management assumptions and valuations. We exploit this issue by examining whether predictive ability of goodwill improved in the presence of Big 4 auditors. We provide evidence that goodwill has a significant predictive ability for second and third-year ahead cash flows which exists only in the firms audited by the large international reputable accounting firms. This suggests that Big 4 auditors play an important role in ensuring appropriate implementation of the present accounting for goodwill.

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