Team 2: Defend the asset/liability approach of accounting for inter-period income tax allocation.
The asset/liability method of income tax allocation is balance sheet oriented. The intent is to accrue and report the total tax benefit or taxes payable that will actually be realized or assessed on temporary differences when their respective future taxable or deductible amounts are expected to occur.
The book states 5 arguments:
1. The balance sheet is becoming more important financial statement. Reporting deferred taxes based on the expected tax rates when the temporary differences reverse increases the predictive value of future cash flows, liquidity, and financial flexibility.
2. Reporting deferred taxes based on the expected tax rates is conceptually more sound because the reported amount represents either the likely future economic sacrifice (future tax payment) or economic benefit (future reduction in taxes).
3. Deferred taxes may be the result of historical transactions, but, by definition, they are taxes that are postponed and will be paid (or will reduce taxes) in the future at the future tax rates.
4. Estimates are used extensively in accounting. The use of estimated future tax rates for deferred taxes poses no more of a problem regarding verifiability and reliability than using, say, estimated lives for depreciation.
5. Because the tax expense results from changes in balance sheet values, its measurement is consistent with the SFAC No. 6 and SFAS No. 130 definitions of comprehensive income.
Others may include:
- Under the International Accounting Standards No. 12 “Accounting for Taxes on Income” only the liability method is allowed.
- If, after being established, and before reversal, the statutory tax rate for those years change, then the deferred tax account will need to be adjusted to reflect the new rate(s).
- Under this