The Valuation Relevance of Reversing Deferred Tax Liabilities

30 Pages Posted: 25 Aug 2003

See all articles by Richard C. Sansing

Richard C. Sansing

Tuck School of Business at Dartmouth

David A. Guenther

University of Oregon - Department of Accounting

Date Written: August 19, 2003

Abstract

This paper compares two attributes of a deferred tax liability (DTL) that arise from differences in book and tax depreciation methods. The first attribute is the effect of the DTL on the market value of the firm. The second is the length of time between when the asset is placed into service and when the DTL associated with that asset begins to reverse. The paper shows that a decrease in the time it takes for the DTL to begin to reverse is neither necessary nor sufficient for the value of the DTL to increase. It also shows that the value of the DTL is not equal to the present value of the future deferred tax expense. The effect of one dollar of DTL on firm value depends only on the tax depreciation rate and the discount rate.

Keywords: Deferred Income Taxes, Depreciation, Valuation

JEL Classification: M41, G12, H25

Suggested Citation

Sansing, Richard C. and Guenther, David A., The Valuation Relevance of Reversing Deferred Tax Liabilities (August 19, 2003). Tuck Business School Working Paper No. 03-24. Available at SSRN: https://ssrn.com/abstract=436965 or http://dx.doi.org/10.2139/ssrn.436965

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

David A. Guenther

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

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