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

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  • David B. Citron

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.

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  • David B. Citron, 2001. "The Valuation of Deferred Taxation: Evidence from the UK Partial Provision Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7‐8), pages 821-852, September.
    • Handle: RePEc:bla:jbfnac:v:28:y:2001:i:7-8:p:821-852
    DOI: 10.1111/1468-5957.00395
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    Cited by:

    1. Akbar, Saeed & Shah, Syed Zulfiqar Ali & Stark, Andrew W., 2011. "The value relevance of cash flows, current accruals, and non-current accruals in the UK," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 311-319.
    2. Erlend Kvaal, 2007. "Discounting and the Treatment of Taxes in Impairment Reviews," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 767-791, June.
    3. Theodore E. Christensen & Gyung H. Paik & Earl K. Stice, 2008. "Creating a Bigger Bath Using the Deferred Tax Valuation Allowance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(5‐6), pages 601-625, June.
    4. Kathleen Herbohn & Irene Tutticci & Pui See Khor, 2010. "Changes in Unrecognised Deferred Tax Accruals from Carry‐Forward Losses: Earnings Management or Signalling?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7‐8), pages 763-791, July.
    5. Arjan Brouwer & Ewout Naarding, 2018. "Making Deferred Taxes Relevant," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 200-230, May.
    6. Erlend Kvaal, 2018. "Discussion of ‘Making Deferred Taxes Relevant’," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 231-241, May.
    7. Malcolm Anderson, 2002. "Accounting History publications 2001," Accounting History Review, Taylor & Francis Journals, vol. 12(3), pages 505-512.
    8. Cernius Gintaras & Birskyte Liucija & Balkevicius Arturas, 2016. "Influence of Rules for Computing Corporate Income Tax on the Accuracy of Financial Statements of Lithuanian Companies," Scientific Annals of Economics and Business, Sciendo, vol. 63(1), pages 65-81, March.
    9. Norman Wong, 2005. "Determinants of the Accounting Change for Income Tax," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 1171-1196.
    10. Anna Görlitz & Michael Dobler, 2023. "Financial accounting for deferred taxes: a systematic review of empirical evidence," Management Review Quarterly, Springer, vol. 73(1), pages 113-165, February.
    11. Hanlon, Dean & Navissi, Farshid & Soepriyanto, Gatot, 2014. "The value relevance of deferred tax attributed to asset revaluations," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(2), pages 87-99.
    12. Mark P. Bauman & Somnath Das, 2004. "Stock Market Valuation of Deferred Tax Assets: Evidence from Internet Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(9‐10), pages 1223-1260, November.
    13. Norman Wong, 2005. "Determinants of the Accounting Change for Income Tax," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5‐6), pages 1171-1196, June.
    14. Beattie, Vivien, 2005. "Moving the financial accounting research front forward: the UK contribution," The British Accounting Review, Elsevier, vol. 37(1), pages 85-114.
    15. Shah, Syed Zulfiqar Ali & Stark, Andrew W. & Akbar, Saeed, 2009. "The value relevance of major media advertising expenditures: Some U.K. evidence," The International Journal of Accounting, Elsevier, vol. 44(2), pages 187-206, June.
    16. Flagmeier, Vanessa & Müller, Jens, 2016. "Tax loss carryforward disclosure and uncertainty," arqus Discussion Papers in Quantitative Tax Research 208, arqus - Arbeitskreis Quantitative Steuerlehre.
    17. Kathleen Herbohn & Irene Tutticci & Pui See Khor, 2010. "Changes in Unrecognised Deferred Tax Accruals from Carry-Forward Losses: Earnings Management or Signalling?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 763-791.

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