Appraising Alternative Methods of Accounting for Accelerated Tax Depreciation: A Relative-Accuracy Approach

Abstract

A significant accounting problem arises whenever a taxpaying firm uses accelerated depreciation for tax purposes but straight-line for financial reporting. Accounting Principles Board Opinion No. 11 requires that a firm which uses different methods of depreciation for tax and book purposes must set up a deferred credit account to record the difference between taxes actually paid and the taxes which would have been paid if straightline depreciation had been used for tax reporting. In this paper, an effort is made to assess the deferral method (D) using a criterion of earnings and rate-of-return accuracy. For this purpose, the deferred credit will be viewed as an offset to the asset's book balance. The assessment is made against two alternative methods of accountingflow-through (F) and accelerated (A) where the latter assumes that accelerated depreciation is used for tax and book purposes.