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Changes in Unrecognised Deferred Tax Accruals from Carry‐Forward Losses: Earnings Management or Signalling?

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  • Kathleen Herbohn
  • Irene Tutticci
  • Pui See Khor

Abstract

This paper examines how managers elect to use their discretion over the amount of unrecognised tax assets from carry‐forward losses that is available under the income statement method specified in AASB1020 ‘Accounting for Income Taxes’. Specifically, we consider whether changes in the amount of unrecognised deferred tax assets from carry‐forward losses, reflect managers’ incentives to opportunistically manage earnings, or communicate private information about future profitability (i.e., signalling). Using data from firms listed on the Australian Stock Exchange during the period 1999 to 2005, we find evidence consistent with income‐increasing earnings management when pre‐tax earnings are below the median analyst forecast. Interestingly, we find that the potential existence of earnings management does not reduce the capacity of changes in unrecognised deferred tax assets from carry‐forward losses to predict one‐year‐ahead performance, and to a much lesser extent, three‐year ahead performance. This result highlights the complexity of managers’ incentives in trading‐off between managing earnings toward a desired target and communicating useful information to market participants.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:7-8:p:763-791
    DOI: 10.1111/j.1468-5957.2010.02207.x
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    References listed on IDEAS

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    Cited by:

    1. Bradley Blaylock & Bradley P. Lawson & Michael A. Mayberry, 2020. "Taxable income, future profitability, and stock returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 858-881, July.
    2. 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.
    3. Kim Mear & Michael Bradbury & Jill Hooks, 2021. "The ability of deferred tax to predict future tax," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 241-264, March.
    4. Dreher, Sandra & Eichfelder, Sebastian & Noth, Felix, 2017. "Predicting earnings and cash flows: The information content of losses and tax loss carryforwards," IWH Discussion Papers 30/2017, Halle Institute for Economic Research (IWH).
    5. Camillo Lento & Julie Cotter & Irene Tutticci, 2016. "Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 633-655, November.
    6. Flagmeier, Vanessa & Müller, Jens, 2016. "Tax loss carryforward disclosure and uncertainty," arqus Discussion Papers in Quantitative Tax Research 208, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Flagmeier, Vanessa, 2017. "The information content of tax loss carryforwards: IAS 12 vs. valuation allowance," arqus Discussion Papers in Quantitative Tax Research 216, arqus - Arbeitskreis Quantitative Steuerlehre.

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