Market's perception of deferred tax accruals

Abstract

This study investigates the value relevance and incremental information content of deferred tax accruals reported under the 'income statement method' (AASB 1020 "Accounting for Income Taxes") over the period 2001-2004. Our findings suggest that deferred tax accruals are viewed as assets and liabilities. We document a positive relation between recognized deferred tax assets and firm value using the levels model, while the results from the returns model suggest that deferred tax liabilities reflect future tax payments. The balance of unrecognized deferred tax assets provides a negative signal to the market about future profitability, particularly for companies from the materials and energy sectors and loss-makers. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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

“…A negative association between the deferred tax asset valuation allowance (i.e., unrecognised deferred tax assets) and future profitability has been documented. In a similar vein, a recent Australian study by Chang et al (2009) documents that changes in the balance of unrecognised deferred tax assets due to losses provides a signal to the market about future firm profitability. We investigate the predictive ability of changes in unrecognised deferred tax assets due to losses further in this paper.…”

“…That is, the greater the proportion of deferred tax assets not expected to be realised in the future (as indicated by the valuation allowance), the more negative the market reaction. Similarly, evidence from a recent Australian study by Chang et al (2009) of the value relevance and incremental information content of deferred tax assets and liabilities recognised under the income statement method suggests that changes in the balance of unrecognised deferred tax assets from carry‐forward losses provides a signal to the market about future firm profitability. That is, increases (decreases) in the balance of unrecognised deferred tax assets are related to a negative (positive) market reaction.…”

The Market Response to Beating After‐tax Earnings Targets Revisited using Analysts’ Pre‐tax Earnings Forecasts and Concurrent Tax Note Disclosures

“…Supporting this assertion, there is evidence that market participants appear to use information on deferred tax assets from carry‐forward losses to inform their decisions. That is, market participants value deferred tax assets from carry‐forward tax losses as assets incorporating managers’ private information about future profitability (Amir and Sougiannis, ; De Waegenaere et al., ; Zeng, ; Chang et al., )…”

“…Using the rationale of Laux (2013), these tax deferrals are likely to be informative since they are included in GAAP income prior to taxable income. In particular, recognition of these assets may convey information about the quality of reported earnings (Herbohn et al, 2010), 7 or provide a signal of future profitability to the market (Amir and Sougiannis, 1999;De Waegenaere et al, 2003;Zeng, 2003;Chang et al, 2009).…”

Influence of Rules for Computing Corporate Income Tax on the Accuracy of Financial Statements of Lithuanian Companies

“…Beaver and Dukes (1972) are among the first to pioneer a study proposing that deferred tax items may be value relevant for investors. Some studies examine the relevance of the timing of the reversal of differences between accounting and taxation regulations that give rise to deferred taxes (Amir et al, 1997;Barth, 2000;Citron, 2001;Chaney and Jeter, 1994;Chang et al, 2009;Sansing, 2000, 2004;Lynn et al, 2008;Wong et al, 2011;Hanlon et al, 2014;Hennig et al, 2010Hennig et al, , 2013. Amir et al (1997) classify deferred tax components into seven categories: depreciation and amortization; losses and credits carried forward; restructuring charges; environmental charges; employee benefits; valuation allowance required; and all other components.…”