Unrecognized Deferred Taxes: Evidence from the UK

Posted: 28 Oct 2003

See all articles by Elizabeth A. Gordon

Elizabeth A. Gordon

Temple University - Department of Accounting

Peter R. Joos

INSEAD

Abstract

We examine whether UK managers use the flexibility provided under the partial method for deferred taxes to measure unrecognized deferred taxes opportunistically. We first test whether firm-specific operational and opportunistic factors are associated with the level of unrecognized deferred taxes. The tests provide evidence certain UK managers opportunistically measure deferred taxes to manage leverage, consistent with arguments by commentators that deferred taxes heavily influence leverage indicators that play a prominent role in the UK contracting framework. Because the proper identification and measurement of both operational and opportunistic determinants of unrecognized deferred taxes influence our tests, we additionally investigate whether unrecognized taxes relate to future deferred tax reversals and future operating profitability of the firm. These tests show the components of deferred taxes predict both future deferred tax reversals and indicators of future profitability of the firm as predicted. Taken together, our results indicate that on average the existence of balance sheet management does not nullify the predictive power of (unrecognized) deferred taxes for future deferred tax reversals and for profitability measures. One implication of the results is that the recent UK standard change eliminating the partial provision method for deferred taxes potentially has reduced the usefulness of deferred tax disclosures.

Keywords: deferred taxes, earnings management, accounting standard, UK

JEL Classification: M41, F23, M41, M43, M44, M47, H25, F23

Suggested Citation

Gordon, Elizabeth A. and Joos, Peter R., Unrecognized Deferred Taxes: Evidence from the UK. Available at SSRN: https://ssrn.com/abstract=462180

Elizabeth A. Gordon (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Peter R. Joos

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

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