1
$\begingroup$

I was wondering why the IAS prohibits companies from discounting their deferred tax items?

Are there any particular economic reasons for implementing such prohibition?

Thank you!

$\endgroup$
1
$\begingroup$

The answer is in the text of IAS 12, and basically amounts to "it's unreasonable to require it, and if we allow firms discretion in doing it, they will only do it when it's in their favor":

The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling of the timing of the reversal of each temporary difference. In many cases such scheduling is impracticable or highly complex. Therefore, it is inappropriate to require discounting of deferred tax assets and liabilities. To permit, but not to require, discounting would result in deferred tax assets and liabilities which would not be comparable between entities. Therefore, this Standard does not require or permit the discounting of deferred tax assets and liabilities.

$\endgroup$
  • 1
    $\begingroup$ (+1) In short, the Board in its wisdom says "with the taxman, anything can go (wrong)". $\endgroup$ – Alecos Papadopoulos Mar 29 '16 at 17:56
  • $\begingroup$ @dismalscience Thanks a lot! That really cleared things up! $\endgroup$ – Nick123 Mar 30 '16 at 1:47
0
$\begingroup$

The lack of discounting will make tax discounting more valuable. Assuming that the market accepts this valuation it will mean increased effort toward tax deferral and possibly increased investment rates. Corporations will hold appreciating assets for longer periods to defer taxes, and will forgo some short term gains in favor of increasing the expected future tax defferal items on the balance sheet.

In practice agents are supposed to be aware of accounting changes though and derive their own valuation independently of arbitrary rules set by some accounting standard.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.