Canadian Products Limited (CPL) is a very large private Canadian company. CPL has been contemplating going public, which, according to business analysts, is just a matter of time. Recently, the president wrote a letter to you, the accounting advisor, complaining about Canadian tax standards and asking for your comments:

We at CPL are very concerned that our current operating performance and debt-to-equity position are grossly misstated due to the standards for accounting for income tax. These standards do not reflect the economic reality of our tax position. In fact, I have heard that many financial analysts ignore deferred income tax accounts. Is that true?

Our deferred income tax balances arise because we are allowed to depreciate our capital assets far more rapidly for tax purposes than they actually wear out. Thus, deductible expenses for tax purposes exceed our book expenses. Last year, our tax expense exceeded taxes payable by \(\$ 17.2\) million. When combined with prior amounts, we have a cumulative difference of \(\$ 190.6\) million, and this difference is expected to continue to increase. Isn't this increasing amount misleading to our investors if it is just going to continue to grow and never decrease?

We estimate that this year's \(\$ 17.2\) million could not possibly be required to be repaid for at least 12 years-and perhaps never if we continue to expand. I understand that if we followed accounting standards for private enterprises instead of international accounting standards, using no allocation, we wouldn't have to expense this amount at all this year. What advantage is there of following these international standards. Should we not just use accounting standards for private enterprises?

We are also disturbed that discounting is not allowed for future tax amounts. If we had any other non-interest-bearing, long-term liability on our books, discounting would be considered appropriate. This inconsistency in the way supposedly analogous liabilities are treated highlights the fact that the deferred income tax liability is, in fact, different.

Required:

Respond to the president's concerns and questions, looking at both sides of each issue raised.