Deferred Tax – Term Paper

Financial statements

The article “It’s time to simplify tax financial reporting” was written by Terry J. Ward in the year 1996. The article was published on November 11 in the Audit and Accounting Forum section in the newspaper the Accounting Today.  It focuses on controversies that surrounded the reporting of income tax on financial statements. For example, in early 1950, there was an argument that suggested that companies should allocate an amount of income tax expense across accounting periods to account for timing differences between reported and taxable income. The Financial Accounting Standards Board issued Statement 109 that required assets and liabilities to interperiod income tax allocation (Ward, 1996). The statement was not operational because one could neither verify nor disprove any revenue tax distribution and it was not useful to investors or lenders. Studies have shown that deferred tax allocation reduces the usefulness of accounting information because it violates the costs and benefits constrain principles. The Flow-through approach is simple and saves companies the additional record keeping cost associated with deferred tax allocation (Ward, 1996). Reporting of income tax should be simplified, useful to all parties that use and meet all the standards of the FASB.

The reporting of income tax should me be simplified (Ward, 1996). Reporting deferred tax in the financial statement is not simple because of it is complex and not logic to estimate taxable or deductible amount in future years. For example, only deferred tax expense is presented in the Income Statement while in the Balance Sheet two categories are presented that is net current and net non-current amount. Moreover, it not logic to use losses of past years to offset the profit of another year as per the use of loss carryback and loss carryforward. Therefore, a person cannot tell what the future holds only God knows. Estimate the net operating loss is difficult because two years are carried back and twenty years are passed forward.  

Deferred tax violates the cost and benefit constraints standards of the FASB (Ward, 1996). Tax benefit realization will be limited if loses carried back or carried forward period is brief. Moreover, if the significant deductible temporary difference is expected to reverse in a single year or when the enterprise operates in a traditionally cyclical business, these factors will also limit the realization of tax benefit.  Additionally, the unsettled circumstances that are unfavorably resolved will adversely affect the forthcoming operation and profit level on continuing basis in the future.

Financial reporting

Accounting for income tax is not of any importance to its various users especially the lenders and investors (Ward, 1996). Creditors and investors are not interested in the future information of the company but are rather interested in how the firm has been and is performing in their decision making.   Moreover, core aspects are left behind while computing the income tax. For example, according to IFRS, some potential liabilities are not recognized whereas, GAAP uses an impairment approach for deferred tax asset. Also, it is hard for some uninformed investors or lenders to understand the deferred tax while presented in the various books of record.

I agree with the writer’s opinion that financial reporting should be simplified. Simplified financial reporting will ensure that people are able to compute and understand the financial information. Different approaches should be established to protect the various firms in the industry. For example, small companies should use the simplest method available. I believe when reporting financial information relevant information concerning the business should be presented to the appropriate people as per the FASB principles. 

References

Ward, J. T. (1996 November 11). It’s time to simplify tax financial reporting. Accounting Today. Page 18-19