The value relevance of deferred tax (in post-IFRS New Zealand)

Abstract

This study investigates whether deferred tax information reported by public companies is value relevant. For decades, critics have argued that deferred tax accounts were not “true” assets or liabilities. This is particularly true of deferred tax liabilities, where the balances grow continuously because new occurrences exceed those that are reversing, resulting in an indefinite postponement of any payment. My study examines whether investors consider deferred tax as a value relevant balance (that is expected to be settled) or whether it is ignored. Using a sample of New Zealand listed firms I perform regression analysis using an adapted Ohlson (1995) model. My sample covers a five-year period (2008-2012) following the adoption of IFRS in New Zealand. I ask the question whether net deferred tax assets and liabilities are related to share price (and what direction the relationship is). I also observe the time series behaviour of deferred tax balances. The results show that net deferred tax is significantly related to market equity prices, and is positive. Therefore, net deferred tax is value relevant and considered a real asset or liability. However, results also indicate that deferred tax liabilities grow consistently over time without payments to settle the obligation. Key Words: Deferred Tax Liability, Value Relevance, Inter-Period Tax Allocation, New Zealand, NZX