AN EVALUATION OF THE USEFULNESS OF ALTERNATIVE ACCOUNTING TREATMENTS OF DEFERRED TAXES IN PREDICTING FINANCIAL FAILURE.

摘要

The nature of the deferred tax account has been a source of controversy since the early 1940s. In the early 1980s, the FASB and others noted that deferred taxes, as defined under APB Opinion No. 11, do not meet the definition of liabilities under current standards. The FASB reevaluated deferred taxes to determine how they should be presented in the financial statements. As a result SFAS No. 96 was issued in 1987, but the effective date of this standard has been postponed twice.; The purpose of this study was to provide evidence concerning whether deferred income tax, as presented in the balance sheet, meets the primary objective of financial reporting, i.e., "to provide information that is useful... in making rational... decisions (SFAC, No. 1, par. 34).".; The ability to predict the event of bankruptcy was used as the criterion to test this purpose. A sample of bankrupt firms and nonbankrupt firms was obtained from the Compustat Total Industrial Research File for the period of 1971 to 1987. Logit models for three methods of reporting deferred taxes, the liability method, the net-of-tax method, and the flow-through method, were developed using the variables from Ohlson's (1980) study. The three models were then compared, using a contingency table, to determine which of these models, if any, predicted the event of bankruptcy better than the others.; The evidence of this study indicates that none of the methods of reporting deferred taxes is better than the other methods in predicting the event of bankruptcy. This indicates that the benefits of SFAS No. 96, which requires the liability method of reporting deferred taxes, may not exceed the costs of reporting this standard.