Discounting Deferred Tax Liabilities.

Abstract The article reports that discounting deferred tax liabilities constitutes a departure from the incurred cost standard underlying the accounting for other liabilities. Nevertheless, this departure has merit, for the operational advantages of deferring taxes are disclosed separately in the income statement. Financial management theory suggests that the appropriate discount rate is the comparable after-tax cost of alternative debt or equity, but the determination of the relevant alternative is not obvious. This ambiguity is not insurmountable, however, for accrual accounting in general is inherently tentative. The important point is that deferred tax liabilities should be reported on a discounted basis. The final determination of the appropriate rate of discount can await further empirical research. The discounting of a deferred tax liability for financial accounting purposes may be illustrated by considering a highly simplified example. Thus, on the first day of 19x1, a firm has 1, 000, 000 of assets on which it earns 14 percent annually before interest and taxes.