The Debt Contract Usefulness Of Deferred Tax Information

The Accounting Standard for Enterprises No.18:Income Tax (the short is CAS 18) takes a new way by balance sheet liability method. Moreover, the listed companies were required to disclose deferred tax information in the balance sheet and out of the balance sheet. It’s widely certified that income tax information has value-relevance, but income tax information, especially the deferred tax assets and liabilities, whether the information influences the corporate debt covenants or not. Deferred tax comes from the differences between book value and tax basis of assets and liabilities, and changes with the economic cycle varying. Whether economic cycle would affect the deferred tax’s usefulness of the debt covenants? These issues are no conclusions. But the study of the issures will not only enrich the usefulness of accounting information in debt covenants, but also have practical value on income tax reform and disclosure.According to the decision-relevant theory of accounting information’s, accounting information has made the credit decision useful; and then the deferred tax information as a part of accounting information should also have debt covenants usefulness. The fluctuation of economic cycle will affect the recognition and measurement of deferred tax, but also have some impact on credit decisions. Based on this analysis, this paper presents debt covenants usefulness of the deferred tax information is affected by the economic cycle. The paper chooses annual data from 2007 to 2013, to analyze the correlation between the deferred income tax and corporate debt covenants. Finally, the paper verifies the impact of economic cycle on the debt covenants usefulness of the deferred tax information.The result shows:(1) Deferred tax information absolutely has a significant impact on the debt covenants. Both deferred tax assets and deferred tax liabilities were significantly positively correlated with the availability of long-term debt. Deferred tax assets, as an asset item listed on the balance sheet, it would affect a series of financial index, such as debt paying ability, profitability and efficiency of management. In addition, it will lead to an increase in net profit in the current period. Deferred tax liabilities, although it may be conveys "bad" signal to creditors, creditors can identify the resource of it, which is considered as a signal of good asset quality. In addition, this paper divides the sample into cyclical and non-cyclical industries, come to the same conclusion. (2)The economic cycle has effect on the debt covenants usefulness of the deferred tax information. When the economy is on the rise, the debt covenants usefulness of the deferred tax information is weakened than the economic contraction. Meanwhile, this paper divided the sample into rise period and decline period. In the rise period, both coefficient and significant of deferred tax assets and liabilities are less than the economic decline period. It also proved the conclusion.