The Association between Deferred Tax Assets and Liabilities and Future Tax Payments

Abstract

This study empirically examines whether deferred taxes provide incremental information about future tax payments and explores whether the relationship is affected by whether and when the deferred tax accounts reverse. The analysis provides evidence that while deferred taxes do provide incremental information about future tax payments, the magnitude of the information is small. Further, consistent with theoretical predictions (Guenther and Sansing 2000, 2004; Dotan 2003) the analysis demonstrates there is an asymmetrical association between deferred taxes and future tax payments. For instance, deferred taxes associated with temporary differences that are included in GAAP income prior to taxable income are associated with future tax payments. In contrast, deferred taxes associated with temporary differences that are included in GAAP income after taxable income are not associated with future tax payments. Finally, the analysis provides evidence that growth in the deferred tax balances does not defer future tax payments. Data Availability: The data are available from public sources.

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

“…The previous research emphasized tax planning, the minimization of tax liabilities using deferred taxes (Taylor and Richardson, 2012;Laux, 2013), and the impact of such deferment on companies' stock prices (Chaney and Jeter, 1994;Wong et al, 2011). This research contributes to the previous research by exploring to what extent and for what reasons companies avoid full recording of deferred taxes.…”

“…The study also revealed that a large part of deferred tax items tend to reverse. Laux (2013) finds that investors seem to value only the information content of specific items of deferred tax; he empirically examines whether deferred taxes provide incremental information about future tax payments and explores whether the relationship is affected by whether and when the deferred tax accounts reverse. His analysis provides evidence that while deferred taxes do provide incremental information about future tax payments, the magnitude of the information is small.…”

“…Further, consistent with theoretical predictions analysis done by Sansing (2000,2004), he demonstrates there is an asymmetrical association between deferred taxes and future tax payments. The analysis provides evidence that growth in the deferred tax balances does not defer future tax payments (Laux, 2013). Hanlon, Navissi and Soepriyanto (2014) suggest that the increment to deferred tax balances upon adopting the balance sheet approach has value relevance, with such value relevance driven by the deferred taxes on certain asset revaluations (Hanlon et al, 2014).…”

Private SME accounting in Poland. Does bank lending influence their accounting and financial reporting practice?

“…There is an asymmetry of information provided by these two different categories: the gaap first (associated with future tax-related cash flows) and the tax first category (without offsetting the tax effects of reversing temporary differences) (Laux, 2013). Opportunistic book and tax reporting undertaken by managers also yields variations in book-tax differences (Tang, 2015;Hanlon & Heizman, 2010).…”

“…In particular, in the case of two-book accounting, while the gaap first category is associated with future taxrelated cash flows that are realised upon reversal of deferred tax assets or liabilities, the tax first category is treated in a different way. New originating temporary differences do not offset the tax effects of reversing temporary differences (Guenther & Sansing, 2004;Laux, 2013). The gaap_first variable includes the recognition of transactions by the company based on accounting standards and the principles of prudence and matching.…”