Differences Between Financial and Tax Depreciation.

Abstract Considerable variation and disagreement have characterized the accounting for, and the rationalization of, differences between financial and tax depreciation. Specifically, the writer believes that the reporting of a deferred income-tax liability and additional income-tax expense for book-tax differences in depreciation is an ad hoc solution that will not stand close theoretical analysis. A difference can be said to exist between financial depreciation and tax depreciation whenever the best depreciation for financial reporting varies from the best depreciation for income-tax purposes. For financial reporting, ideal depreciation presumably reflects the annual amounts that best reflect financial status and operating results, including their combined result in terms of the rate of earnings. One of the fundamental issues in the controversy about book-tax differences in depreciation is whether taxes payable in the future from future revenues create a liability prior to the recognition of this future revenue.