In the following exercise, you are required to review the Basis for Conclusions (BCs) for the standard(s) that provide the accounting guidance for this topic. Because the BCs is generally not included in the codification and thus is not authoritative, it will most likely be necessary for you to research it through review of the pre- codified standards. Appropriate references have been provided to allow you to do so. Pre- codified standards are accessible on the FASB website at www. fasb. org, or, in the event that your school participates in the American Accounting Association’s Academic Accounting Access program, they may be found there as well.
Scene 1:
The concept of the deferred tax liability (which is reported under both U. S. GAAP and IFRS) has been at the root of disagreement among financial statement users for quite some time. While some do believe that it is truly a liability, others do not. The following is an excerpt from “ The Valuation of Deferred Taxes,” by Eli Amir, Michael Kirschenheiter and Kristen Willard, published in Contemporary Accounting Research, Vol. 14, No. 4 ( Winter 1997), pages 597– 622.
Financial statement users often disagree as to the most appropriate method for valuing a firm that has deferred tax assets and liabilities on its balance sheet. Some claim that net deferred taxes represent obligations to pay taxes in the future, and hence, should be regarded as financial liabilities. As such, these liabilities should be offset against the firm’s other long- term net financial assets. Proponents of this method often argue that if the temporary differences, which gave rise to the deferred tax liabilities, are not expected to reverse (settle) in the near future, these liabilities should be discounted similar to other long- term financial obligations, taking into account the expected time to achieve reversal and the cost of borrowing.
Others argue that many deferred tax liabilities (e. g., deferred taxes resulting from depreciation and temporary amortization differences) are never settled; hence, net deferred tax liabilities should be added to ( and net deferred tax assets should be subtracted from) the firm’s book value of shareholders’ equity. Consistent with this approach, Statement of Standard Accounting Practice ( SSAP) No. 15 issued by the Accounting Standards Committee in the United Kingdom ( ASC 1985) requires companies to adopt a partial inter period tax allocation method, that is, to recognize only those deferred taxes that are expected to materialize in the foreseeable future ( 3– 5 years). This partial recognition effectively regards long- term temporary differences as part of equity.
Read paragraphs 75 through 79 in the BCs of FASB’s Statement of Financial Accounting Standards No. 109, “Income Taxes.” Does the FASB believe that the deferred tax liability is really a liability? How does it support this position?
Scene 2:
Do you agree with the FASB’s position and its supporting arguments? Please explain and support your position. Scene 3: IFRS Consistent with the discussion above, some financial statement users believe that the deferred tax liability account should be discounted, or that a partial inter period tax allocation method should be allowed. Read International Accounting Standard 12, “Income Taxes,” paragraphs 16, 53, and 54. Also, read paragraphs 198, 199, 203, 204, and 205 in the BCs of FASB’s Statement of Financial Accounting Standards No. 109, “Income Taxes.”
a. Do the boards allow deferred tax liabilities to be discounted?
b. Do the boards allow the use of a partial interperiod allocation method?
c. How do the boards support their position on discounting?
d. How does the FASB support its position related to interperiod tax allocation?