A Financial Statement Analysis Approach To Deferred Taxes

In Statement 96, the Financial Accounting Standards Board requires the liability method of comprehensive interperiod tax allocation, thus labeling deferred taxes as a liability. One criterion for determining the best method of accounting for deferred taxes is usefulness. The important question with regard to the deferred tax account is how to treat it. The answer depends on the nature of the deferred item, the likelihood of future reversal, and whether the account has been constantly growing. Using partial allocation with discounting shifts the burden of classifying timing differences as recurring or nonrecurring from the user to the firm, which should be better able to make the classification. When this method is used, interperiod tax allocation is applied for nonrecurring timing differences that are expected to reverse in the near future. It also provides for the inclusion of deferred tax effects of such timing differences, discounted to their present value.