The Valuation of Deferred Taxation: Evidence from the UK Partial Provision Approach

Abstract

The UK provides a virtually unique environment in which to examine the information content of the partial provision approach to deferred tax accounting. In addition this issue is of particular interest to UK accounting standard setters in the light of trends towards international accounting standard harmonisation. Taking the total amount of deferred taxation to be equal to the partial balance sheet provision plus the potential portion appearing in the notes, this study tests the relationship between these various deferred tax components and market value. It also examines the economic rationale for the potential portion. The study is based on 1,512 company/years from the period 1989-1991. It finds that, while the full amount of deferred taxation is not valued by the market as a liability, there is evidence of the partial balance sheet provision being so valued. There is also evidence that the potential portion is positively related to market value, consistent with its proxying for information about future growth. This result is supported by the positive relation between the potential portion and measures of future capital spending, indicative of an underlying economic rationale for this deferred taxation component. From a regulatory perspective, the study concludes that the main benefit of the partial provision approach is that the balance sheet amount constitutes a reasonably reliable measure of the portion likely to crystallise as a liability, information that would be lost were only the full amount to be disclosed. Copyright Blackwell Publishers Ltd 2001.

The value relevance of cash flows, current accruals, and non-current accruals in the UK

“…Further, given the preponderance of prior UK returns-based analyses, the use of a different methodology is a useful way of extending prior work on the value relevance of cash flows and accruals. Certainly, there have been plenty of other UK studies using levels-based designs in other value relevance studies in the recent past including, for example, Green, Stark, and Thomas (1996), with respect to research and development expenditures, Rees (1997), with respect to dividends, debt and investment, Garrod and Rees (1998), with respect to international diversification and segmental disclosures, Citron (2001), with respect to deferred taxation, Akbar and Stark (2003), with respect to dividends and capital contributions, and Shah, Akbar, and Stark (2009) with respect to advertising expenditures. Jiang and Stark (2011) study the valuation of loss firms in the UK and, similar to the analysis of Darrough and Ye (2007) in the US, find that the size of loss is value irrelevant in the UK.…”

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.…”

Zur Zeitwertbilanzierung latenter Steuern in der internationalen Rechnungslegung

“…Auch die Offenlegung des nichtbilanzierten Teils trägt zu einer verbesserten Informationslage bei und kann somit die Entscheidungsnützlichkeit erhöhen (vgl. Citron 2001, Gordon und Joos 2004. 2) Wie gezeigt wurde ist die Parameterbestimmung innerhalb des Barwertkalküls unweigerlich mit Ermessen für die bilanzierenden Unternehmen verbunden.…”