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This study explores the value of the tax deferral option. By examining ex-day stock-price-change ratios for taxable stock dividends in Taiwan, we find that the tax deferral option is valuable to investors. For a $1 taxable stock dividend, the tax deferral option produces 33.9 ¢ in tax savings, which suggests a tax deferral parameter of 11.3%. We also find that stocks with the tax deferral option have higher trading volumes around ex-days than those without this option, and that higher investor-level tax rates lead to higher value of the tax deferral option. We contribute to the literature by cleanly determining the value of the tax deferral option; our result is not confounded by the restart option. [ABSTRACT FROM AUTHOR]

This study examines analyst forecast revisions after the disclosure of firms' deferred tax adjustments following the U.S. Omnibus Budget Reconciliation Act of 1993 (OBRA), which raised the corporate income tax rate from 34 percent to 35 percent. This deferred tax adjustment was a one-time item, and should have had no effect on analyst estimates of future earnings. However, we find that forecast revisions issued after the disclosure of an income-decreasing deferred tax adjustment were positively related to the amount of the adjustment. The complexity of the deferred tax adjustment and the newness of SFAS 109 (which required the adjustment) may have contributed to the failure of analysts to properly interpret this one-time item when revising their earnings forecasts. [ABSTRACT FROM AUTHOR]

The article examines the effect of deferred taxes on security prices. The study examines whether an association exists between security returns and the non-current deferred tax component of earnings and explores the reasons for such an association. Recent research has led to a conjecture that differences in the valuation implications of various accrual accounts may be so highly contextual that simple descriptions have little or no explanatory power. Deferred taxes are explored in detailed, taking into account the economic context in which the component is interpreted and the compositions of the items giving rise to deferred taxes. Tests-based on firm-specific characteristics and components of deferred taxes are developed to assess cross-sectional differences in the future cash flow consequences of deferred taxes and the potential value of the information imbedded is investigated. It has been shown that a negative association exists between deferred taxes and security returns after controlling for pseudo-net income, at least for some subsets of firms. It supports the view that the current method of reporting is more consistent.

This article compares the liability, stockholders' equity and asset reduction treatments in terms of classification accuracy for several combinations of financial ratios in the U.S. The results were consistent for all of the combinations. No differences in classification accuracies for financial ratios calculated under the three treatments of deferred income taxes were found. Both partial allocation and discounting of the deferred income tax liability have been proposed. The results of the study suggest that further consideration of each proposal is warranted. First, one possible explanation of these results is that no one user treatment is employed exclusively in decision making. Other factors affecting a rating decision may also be affecting the treatment of the deferred taxes. The results are consistent with the notion that deferred taxes are not relevant in rating decision, or that the nondiscounted amount renders the information useless. If further research determines that the amounts are not relevant in users' decision making, then elimination of the deferred tax disclosures should be considered. If additional study determines that the nondiscounted amount renders the information useless, even though the concept is relevant, then a requirement for reporting discounted amounts should be considered.

This article explores the alternative user treatments of the financial disclosures of deferred taxes in the U.S. in the 1990s. Predictive ability studies were seen as a means of operationalizing the decision-usefulness criterion. The attempts to operationalize the criterion have been applied to bankruptcy predictions and bank loan classifications. The predictive-ability criterion was also used to evaluate lease disclosures, general price level information and specific price level adjustments. Financial ratios were restated for the firms in the sample following these alternatives: liability treatment; stockholders' equity treatment; and asset reduction treatment. Each of the treatments is related to a possible treatment of the deferred income tax credit in the decision-making processes of financial statement users. The first alternative is based on the assumption that the financial statement user believes that the tax will be paid in the near future. The second alternative is based on the assumption that increases in the deferred taxes are de facto earnings. The third alternative treatment assumes that tax deductibility and taxability are factors in the valuation of assets. The stockholders' equity treatment is the equivalent of nonallocation or the liability method with a present value of zero for the liability.

This article discusses the income tax accounting provisions included in the Statement No. 96 issued by the U.S. Financial Accounting Standards Board in December 1987. This Statement supersedes APB Opinion No. 11, which has governed accounting for the effects of income taxes in financial statements. Inherent in the Statement are certain assumptions that theoretically violate the accounting concept of going concern. Thus, the application of the procedures outlined in the Statement, in conjunction with enacted tax laws, in many cases, produces both overstated deferred tax asset accounts and understand deferred tax liability accounts. The Statement changes the method of accounting for deferred taxes from the deferred method to a version of the liability method. The requirements and rules included in the Statement is discussed in the entire article. It is concluded here that there is a need to amend the computational guidelines contained in Statement 96 so that the results of application provide meaningful and understandable accounting information. Users of financial statements should be able to view the balances in the deferred tax and related accounts as legitimate receivables or payables. Furthermore, accounting data should provide a realistic basis for predicting the future cash consequences of events that are incorporated into the current-period statements.

This paper views deferred income taxes as a summary measurement correction that adjusts the various income statement items to an aggregate net-of-tax valuation. Further, the author observes that the tax effects of revenue timing differences are conceptually distinct from the tax effects of expense timing differences and concludes that the FASB should adopt a combination method of comprehensive interperiod allocation. [ABSTRACT FROM AUTHOR]

The article analyzes practices in reporting deferred taxes and the degree to which disclosures of deferred taxes are accomplishing the objectives of the U.S. Financial Accounting Standards Board. Over 200 firms was selected and their accounting for deferred taxes were examined. The disclosures relating to deferred taxes are not informative. Most firms discuss their accounting for deferred taxes in a footnote in the financial reports and authoritative bodies has been prompted to make greater attempts at disclosure.

The article focuses on financial accounting systems for real estate exchanges in the U.S. The system involves the recording of exchanges on the basis of the fair values of the properties involved. Simultaneous and non-simultaneous exchanges of real property are taken into account in record-keeping. There are several methods used for accounting for deferred taxes. Government authorities has released several guidelines for businesses for streamlining their real estate exchanges in a clear and concise form.

The article discusses the two statements on deferred taxation by the Institute of Chartered Accountants in England and Wales and the International Accounting Standards Committee and a recommended solution for the measurement problems in accounting for deferred taxes. The two authoritative bodies have modified their positions with regards to income tax allocation and have adopted both the liability and deferred procedures and have accepted partial tax allocation. However, these moves do not solve the current problems with deferred taxes but have even re-created other problems. A more practical and realistic solution would be to use different methods in measuring income tax expense and the amount of deferred taxes. This proposed method offer more relevant and reliable amounts of deferred taxes.

This article summarizes the major subsequent developments since the Accounting Principles Board's (APB) issuance of Opinion No. 11. in the U.S. in 1979. The major provision of APB No. 11 is that income tax expense is to be determined on the basis of comprehensive allocation. Comprehensive allocation means that all timing differences are considered in determining the income tax expense for the period being reported upon. Hence, the two main alternative approaches to comprehensive allocation are no allocation and partial allocation. The no allocation approach reports income taxes in the financial statements in an amount equal to the taxes determined on the tax return for the same period. Partial allocation requires tax allocation only for the timing differences which do not give rise to indefinite postponements of an amount of tax payments or to continuing tax reductions. In other words, if a timing difference reverses in the foreseeable future and is not expected to be replaced by a series of similar timing differences which will continue to be generated indefinitely, the tax effect of the difference must be tax allocated. Thus, having made the basic decision to employ comprehensive allocation, the APB then had to decide how to determine the tax effect of the timing differences.

This section introduces several articles which focused on business accounting. The article by John N. Kissinger on deferred income tax allocation is timely, given the U.S. Financial Accounting Standards Board's Exposure Draft on the subject. Although Exposure Draft espouses the liability method and Kissinger the net-of-tax method, many of his insights should aid in understanding this subject. Meanwhile, a pragmatic study is conducted by George O. Gamble based on the theory of property rights, which develops how financial statements may be made more analytically useful and consistent with cash flow consequences. Earl A. Ludman focuses on insider trading; he gives the rationale for the need to regulate it and counters arguments of free-market advocates who propose lifting or limiting regulation. Rolf Rundfelt rounds out the insider regulation issue by discussing the extent of insider regulation in Europe. Finally, Stephen A. Zeff's paper continues the debate over certified public accountant (CPA) competition and its possible impact on professionalism. Here, Zeff concentrates on the fall-off of advocacy articles and other writings by managing and other senior partners of major CPA firms as well as the firms themselves.