On the value of deferred taxes

Abstract

The value of the deferred tax liability or asset (DTL or DTA) has been questioned ever since inter-period tax allocation became generally accepted accounting principles (“GAAP”). Opponents of inter-period tax allocation argue that in a growing firm most components of the DTL, most notably depreciation, will never reverse or will reverse only in the far future, which reduces their present value to zero or very close to zero. In recent papers, Sansing (1998) and Guenther and Sansing (2000) claim that DTL and DTA have value, though the value does not depend on whether or when it reverses. In this study, I demonstrate that while certain components of the DTL (DTA) have value, the depreciation-related and similar components of the DTL (DTA) have no value whatsoever, irrespective of the reversal period of these temporary differences. I reconcile my results with those of Sansing (1998) and show that once the asset is properly valued at its value to the firm, the DTL becomes redundant. Finally, I show that for those deferred taxes that have value, it is the timing of tax cashflows rather than the timing of their reversal that affects their value. © City University of Hong Kong.