Abstract The author argues that the discounting of deferred income taxes is theoretically consistent with current generally accepted accounting principles and with the other tentative conclusions of the U.S. Financial Accounting Standards Board (FASB) and that to ignore discounting of taxes is to ignoer economic facts that should be reflected in the measurement of tax assets, tax liabilities and income. Because interest on deferred taxes would not be tax deductible and most corporations are debt leveraged--or at least, without benefit of deferred taxes an entity would require additional borrowing--I believe the after-tax cost of debt to be the preferable discount rate. Under the liability approach, deferred taxes are either assets or liabilities with the balance in the account determined by timing differences and the tax rate expected to be in effect in the reversal periods. One of the primary reasons for reconsidering accounting for income taxes is the inconsistency of the deferred method and the FASB conceptual framework. Unless corporate tax rates are expected to decrease in the future, the liability method without discounting will give rise to deferred tax account balances equal to or greater than those generated under the deferred method. If, for example, the FASB should decide that all the undistributed earnings of a subsidiary included in consolidated income or in income of the parent company should be accounted for as a timing difference, significant instantaneous increases in deferred taxes and instantaneous charges to income or retained earnings could result.
Frank R. Rayburn (Sun,) studied this question.