Deferred Taxes and Bond Ratings: A Canadian Case

Abstract

This paper explores the usefulness of the current Canadian Institute of Chartered Accountants standard on accounting for income taxes in bond rating decisions by credit analysts. Bond rating prediction models using accounting variables generated with alternate treatment of income taxes, have been developed. The analysis indicates that additional information presented by the above standard has not contributed significantly to the bond raters' decision making process. Copyright Blackwell Publishers Ltd 1997.

Financial accounting for deferred taxes: a systematic review of empirical evidence

“…Moreover, Edwards ( 2018 ) observes a negative relation between increases in the valuation allowance and credit ratings. Only an early study on Canadian firms does not find a relation between deferred tax variables and credit ratings (Chattopadhyay et al 1997 ), but their sample predates the major accounting scandals. These results confirm Crabtree and Maher’s ( 2009 ) assumption that rating agencies have only reacted sensitively to deferred taxes in the wake of the accounting scandals.…”

On the incidence of deferred taxes, intangibles and non-linearities in the relationship between Tobin's Q and ROI

“…The question that arises is whether or not deferred tax is to be treated as a debt by myriad users of financial statements, including credit rating agencies and investors. The inclusion or exclusion of deferred tax while computing debt and the resultant effects on debt-toequity ratios does not seem to have any differential impact on credit rating decisions (e.g., Chattopadhyay, Arcelus, & Srinivasan, 1997). The impact of deferred tax on the stock's market risk has been studied by several authors with largely inconclusive results (for a good summary, see Chandra & Ro, 1997).…”

The Determinants of Credit Ratings in the United Kingdom Insurance Industry

“…NOTES 1 A useful review of some of the early literature is provided in Perry et al (1988). Chattopadhyay et al (1997) return to the issue of the determinants of bond ratings using Canadian data and demonstrate that ratings are not affected by changes in the accounting treatment of deferred tax. 2 Pottier and Sommer (1999) provide a helpful historical review of this literature and describe the relevance of such studies to examinations of insurance company ratings.…”