Abstract Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, says that firms should recognize a deferred tax asset associated with deductible temporary differences to the extent that realization of the asset is expected. SFAS 109 adopts an "Impairment" approach to estimating the amount of net deferred tax asset to be recorded; i.e., one should start with the full potential asset amount and then adjust downward as negative evidence concerning realizability warrants. SFAS 109 also describes an alternative "Affirmative" approach under which one would start at zero and then adjust the deferred tax asset upward as positive evidence about realizability warrants. Although SFAS 109 requires the "Impairment" approach, it also asserts that both the Impairment approach and the Affirmative approach would lead to the same deferred tax asset amount if a "more likely than not" realization criterion is employed. However, prior research in psychology and accounting found that different starting points can affect individuals' judgments because of the psychological phenomenon of anchoring and (insufficient) adjustment. The anchoring and (insufficient) adjustment phenomenon suggests that the Impairment approach would lead to recording larger deferred tax asset values than the Affirmative approach. This paper reports results of an empirical test of whether this anchoring and adjustment prediction is correct or whether the FASB's assertion is correct. We provided different groups of practicing auditors with experimental cases that differed only in the approach (Impairment or Affirmative) used to judge the appropriate deferred tax asset amount to report on a hypothetical firm's balance sheet. Statistical analysis of the auditors' judgments shows that, consistent with the anchoring and adjustment expectation, the Impairment approach of SFAS 109 leads auditors to record larger amounts of deferred tax assets than the Affirmative approach.
HEIMAN‐HOFFMAN et al. (Tue,) studied this question.