Continuing Case Against Inter-Period Tax Allocation

Abstract

The annual and industry-based behavior of deferred tax balances is analyzed and the accounting theory and procedures required by the FASB are examined in the context of the unit problem. The unit problem involves the selection of the appropriate perspective (either individual or aggregate) for applying measurement and recognition conventions to phenomena of interest. From an individual event perspective, the FASB's conclusions regarding liability recognition are inconsistent with the definition of liabilities found in the Statement of Financial Accounting Concepts No. 6. In addition, the use of inconsistent perspectives by S109 creates disagreements with the FASB’s position, where both the individual and aggregate perspectives are used simultaneously as the basis of the FASB's decisions. The impact of eliminating deferred taxes and adjusting the liability and stockholders equity balances on the debt-to-equity (DTE) ratio is computed for each year and 20 industries in the COMPUSTAT database (1997 – 2006). The change results in significant decreases in DTE each year and in all industries.