An Analytical Basis for the Treatment of Corporate Income Tax

A significant amount of controversy surrounds the treatment of corporate income tax deferrals within accrual accounting. The Financial Accounting Standards Board Statement 96 recommends comprehensive tax allocation, while a study commissioned by the Canadian Institute of Chartered Accountants recommends a movement from comprehensive to partial allocation. This emphasizes the need to examine all accounting issues within a theoretical framework. Therefore, an analytical framework for the treatment of corporate income tax within the accrual basis of accounting is proposed. It is argued that since income tax is a cost of carrying on business, it is necessarily an expense and should be treated as a liability. Under a comprehensive allocation, any deferral is assumed to ultimately reverse, while under a partial allocation, the likelihood of reversal and the type of timing difference must be considered.