ANALYSIS OF FINANCIAL ACCOUNTING MEASURES OF DEFERRED TAX LIABILITIES

Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109, FASB 1992) represents the culmination of a multi-year process in which the Financial Accounting Standards Board (FASB) reviewed and subsequently modified the requirements for accounting for income taxes. Effective for fiscal years beginning after December 15, 1992, SFAS 109 requires an "asset and liability" approach for the accounting for income taxes. Previously, Accounting Principles Board Opinion No. 11, Accounting for Income Taxes (APB 11, APB 1967) required the use of the "deferred" approach to accounting for income taxes.; In enacting SFAS 109, the FASB believed "the asset and liability approach produces the most useful and understandable information and that it is no more complex than any other approach to accounting for income taxes." This study compares the SFAS 109 and APB 11 deferred tax amounts to determine if (i) the FASB was successful in providing financial statement users with more useful and understandable information, (ii) the market was able to infer SFAS 109 amounts before their release, and (iii) SFAS 109 improved the balance sheet to the detriment of income statement measures of deferred tax expense. Additionally, SFAS 109 deferred tax asset disclosures are analyzed to determine if application of SFAS 109's asset recognition provisions results in the recognition of value-relevant deferred tax assets.; Evidence suggests that SFAS 109 provides value-relevant information to investors above and beyond that of APB 11. However, when information specific to SFAS 109 is aggregated with APB 11 information, the aggregate SFAS 109 liability is only marginally more informative than the APB 11 liability. Second, evidence suggests that the market was able to infer SFAS 109 amounts before their release and that the release of SFAS 109 information, on average, did not significantly alter the valuation of SFAS 109 amounts. Third, evidence suggests that SFAS 109 did not adversely impact income statement measures of deferred tax expense. Finally, evidence suggests that deferred tax assets determined in accordance with SFAS 109 are value-relevant.