Liability

Financial Research

Note: In the following exercise, you are required to review the Basis for Conclusions (BCs) for the standard(s) that provide the accounting guidance for this topic. As the BCs is generally not included in the codification and thus is not authoritative, it will most likely be necessary for you to research it through review of the pre-codified standards. Appropriate references have been provided to allow you to do so. Pre-codified standards are accessible on the FASB website at www.fasb.org or, in the event that your school participates in the American Accounting Association's Academic Accounting Access program, they may be found there as well.

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The concept of the deferred tax liability (which is reported under both US GAAP and IFRS) has been at the root of disagreement among financial statement users for quite some time. While some do believe that it is truly a liability, others do not. The following is an excerpt from “The Valuation of Deferred Taxes,” by Eli Amir, Michael Kirschenheiter and Kristen Willard published in Contemporary Accounting Research, Vol. 14, No. 4 (winter 1997), pages 597–622.

“Financial statement users often disagree as to the most appropriate method for valuing a firm that has deferred tax assets and liabilities on its balance sheet. Some claim that net deferred taxes represent obligations to pay taxes in the future, and hence, should be regarded as financial liabilities. As such, these liabilities should be offset against the firm's other long-term net financial assets. Proponents of this method often argue that if the temporary differences, which gave rise to the deferred tax liabilities, are not expected to reverse (settle) in the near future, these liabilities should be discounted similar to other long-term financial obligations, taking into account the expected time to achieve reversal and the cost of borrowing.

“Others argue that many deferred tax liabilities (e.g., deferred...