Tax Allocation and Non-Historical Financial Statements.

Abstract The purpose of this article is to explore the applicability or non-applicability of tax allocation procedures to financial statements prepared on the basis of either current cost or price-level adjusted figures. Both current cost and price-level adjusted financial statements offer the balance sheet a position of more prominence than does the present-day historical cost approach. In the area of tax allocation, present practice and present theory are in basic agreement. Tax allocation can and should be rationally applied to historical cost statements, current cost statements or price-level adjusted statements. One weakness of the tax deferral approach is that it does not cover enough situations. For example, take the fairly common situation where a partnership incorporates, bringing in new investors at the same time. The books will often show assets at agreed-upon values at the date of incorporation, and these may differ sharply from the tax basis of the same assets. One type of objection to present practice points out that historic costs relate to the time periods in which assets were acquired, but are not meaningful expressions of value at later points in time. In contrast to historical cost, "the current cost of an asset is the sum of the current costs of the contained inputs."