Accepted Manuscript

The Value Relevance of Deferred Tax Attributed to Asset Revaluations

Dean Hanlon, Farshid Navissi, Gatot Soepriyanto

PII: S1815-5669(14)00011-3

DOI: http://dx.doi.org/10.1016/j.jcae.2014.03.001

Reference: JCAE 50

To appear in: Journal of Contemporary Accounting & Economics

Received Date: 2 April 2012

Revised Date: 10 February 2014

Accepted Date: 10 February 2014

Please cite this article as: Hanlon, D., Navissi, F., Soepriyanto, G., The Value Relevance of Deferred Tax Attributed

to Asset Revaluations, Journal of Contemporary Accounting & Economics (2014), doi: http://dx.doi.org/10.1016/

j.jcae.2014.03.001

This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers

we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and

review of the resulting proof before it is published in its final form. Please note that during the production process

errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

1

The Value Relevance of Deferred Tax Attributed to Asset Revaluations∗

Dean Hanlon*

Department of Accounting Monash University, Australia

Farshid Navissi

Department of Accounting Monash University, Australia

Gatot Soepriyanto

Department of Accounting and Finance Bina Nusantara University, Indonesia

*Corresponding author Department of Accounting Monash University Caulfield, Victoria, AUSTRALIA, 3145 Phone: +61 3 9903 2021 Email: Dean.Hanlon@monash.edu

The authors appreciate the constructive comments of the anonymous reviewer, and discussants and conference participants at the Journal of Contemporary Accounting and Economics (JCAE) 2012 Mid-year Symposium, the American Accounting Association (AAA) 2008 Annual Meeting, and the Accounting and Finance Association of Australia and New Zealand (AFAANZ)/International Association for Accounting Education and Research (IAAER) 2008 Annual Conference.

2

The Value Relevance of Deferred Tax Attributed to Asset Revaluations

ABSTRACT Our study focuses on the incremental value relevance of the balance sheet relative to the income statement approach to deferred tax accounting and whether such value relevance is attributable to firms being required to report the deferred tax consequences of asset revaluations. Our results suggest that the increment to deferred tax balances upon adopting the balance sheet approach has value relevance, with such value relevance driven by the deferred taxes on certain asset revaluations (specifically, property, plant and equipment, and equity-accounted investments). We interpret our results as reflecting investors’ preference for the balance sheet approach to deferred tax accounting and their view that deferred taxes on asset revaluations are real liabilities.

Keywords: Accounting for deferred taxes, balance sheet approach, income statement

approach, property, plant and equipment, asset revaluation.

JEL classification: M41.

3

1. INTRODUCTION

There are numerous studies on the association between share prices and deferred

taxes, including those that examine the relevance of: the timing of the reversal of

differences between accounting and taxation regulations that give rise to deferred taxes

(Jeter and Chaney, 1988; Chaney and Jeter, 1989; Givoly and Hayn, 1992; Guenther and

Sansing, 2000; 2004; Citron, 2001; Lynn et al., 2008; Wong et al., 2011); the income

statement approach to accounting for deferred taxes (Beaver and Dukes, 1972; Chaney

and Jeter, 1994; Chang et al., 2009); and the disclosure of components comprising

deferred tax balances (Amir et al., 1997; Amir and Sougiannis, 1999). Our study

complements the above literature by examining the incremental value relevance of the

balance sheet approach to accounting for deferred taxes relative to the income statement

approach and whether such incremental value relevance (if any) is attributable to the

deferred tax consequences of asset revaluations.

Following the adoption of International Financial Reporting Standards (IFRS) in

Australia, the Australian equivalents to IFRS (AIFRS) prescribed a change in the

accounting for deferred taxes by introducing AASB112 Income Taxes (AASB 112), a

balance sheet approach to accounting for deferred taxes, to replace the income statement

approach of AASB1020 Accounting for Income Tax (Tax-effect Accounting) (AASB

1020). This change was similar to that experienced earlier in the United States (US),

when an income statement approach to deferred taxes (Accounting Principles Board

Opinion No. 11 Accounting for Income Taxes (APB 11)) was replaced by a balance sheet

4

approach (Statement of Financial Accounting Standards No. 109 Accounting for Income

Taxes (SFAS 109)). Australia operates in an environment that allows the revaluation of

assets, including property, plant and equipment (PPE), as opposed to the non-revaluation

environment of the US where evidence of the incremental value relevance of the balance

sheet approach to deferred taxes has been reported (Ayers, 1998). We expect that the

balance sheet approach of AASB 112 will have differing equity valuation implications to

those previously recognized in the US literature because it operates in an asset

revaluation environment. Our results are, therefore, pertinent to policy makers, including

accounting regulators, mindful of investor perceptions of deferred taxes under the balance

sheet approach and, more specifically, those arising from asset revaluations.

The balance sheet approach recognizes deferred tax liabilities (DTLs) on taxable

temporary differences which arise when the carrying amount of assets exceed their tax

base. The upward revaluation of assets for accounting purposes, which is not permitted

for tax purposes, creates a taxable temporary difference and a resultant DTL representing

a future tax obligation on the revaluation amount. The recognition of this additional new

liability, which does not exist under either the income statement approach or the balance

sheet approach in an environment where asset revaluations are not permitted, is likely to

influence investor perceptions of the value relevance of the balance sheet approach.

Relying on the information contained within the revaluation reserve an investor could,

under the income statement approach, estimate ‘notional’ DTLs on asset revaluations and

price these accordingly. Any evidence related to the balance sheet approach under AIFRS

that we observe in our study suggests that the balance sheet approach provides

incremental value relevance beyond what has potentially been captured through

5

investors’ efforts to indirectly determine the deferred tax consequences of asset

revaluations in the absence of the balance sheet approach.

Prior studies provide inconclusive evidence on whether a DTL is viewed as a

“real and imminent liability” (Givoly and Hayn, 1992, p. 395) by investors. In the US,

previous findings that DTLs are value relevant under the income statement and balance

sheet approaches (Beaver and Dukes, 1972; Givoly and Hayn, 1992; Ayers, 1998) are

tempered by the likelihood and timing of the DTLs’ settlement (Givoly and Hayn, 1992;

Amir et al., 1997). Within an Australian context, the value relevance of DTLs under the

income statement approach is limited to loss-making, tax-consolidating firms only

(Chang et al., 2009), with no Australian study examining the valuation of DTLs

determined under the balance sheet approach. The sensitivity in findings seems

attributable to investors’ perceptions of whether the timing (or temporary) difference

creating the DTL will reverse in the foreseeable future and, consequently, necessitate a

future tax payment. Upward asset revaluations reflect their enhanced estimated value

(Aboody et al., 1999), recoverable through the asset’s use and/or disposal (Barth and

Clinch, 1998). While prior research finds evidence that investors view asset revaluations,

including the revaluation of PPE, as informative (Amir et al., 1993; Easton et al., 1993;

Barth and Clinch, 1998; Aboody et al., 1999), no empirical evidence exists on the value

relevance of the deferred tax consequences of revaluations. We contend that enhanced

asset values increase firms’ future tax commitments, as the enhanced value is recovered

through the asset’s continued use as an income-producing asset (triggering income tax

payable) or its disposal as an appreciated asset (triggering capital gains tax payable). As

6

such, the DTLs on asset revaluations reflect forthcoming tax payments that,

consequently, investors will perceive as real liabilities.

The previously unexplored research question we address is whether the value

relevance of the balance sheet approach holds in a revaluation environment and whether

deferred taxes directly attributable to asset revaluations are value relevant. To address

this question, we first examine the incremental value relevance of the balance sheet

approach beyond the income statement approach in Australia, which permits the upward

revaluation of assets. Second, we investigate the role of DTLs arising exclusively from

the upward revaluation of assets, including PPE, in contributing to the value relevance of

the balance sheet approach. We find that the balance sheet approach to deferred taxes

provides investors with more value relevant information when compared with the income

statement approach. Moreover, the results from cross-sectional analyses indicate that

DTLs attributable to asset (in particular, PPE) revaluations are value relevant, and

significantly more so than DTLs arising from non-revaluation sources, providing

evidence that recognizing the deferred tax consequences of PPE revaluations contributes

directly to the incremental value relevance of the balance sheet approach.

The remainder of the study is organized as follows. A background to the

regulatory changes in deferred tax accounting is provided in Section 2. Development of

hypotheses is discussed in Section 3. Section 4 presents the sample selection and

empirical methods of the study. Main results are reported in Section 5, with sensitivity

analysis conducted in Section 6. Summary and conclusions are drawn in Section 7.

2. REGULATORY BACKGROUND

7

Australian firms are required to prepare their financial statements in accordance

with AIFRS for reporting periods commencing on or after 1 January, 2005. In the year of

transition from Australian GAAP (AGAAP) to AIFRS, Australian firms were required to

prepare full comparative financial statements in accordance with both AGAAP and

AIFRS, with any divergence disclosed in the notes to accounts. In the year of transition,

AGAAP required an application of the income statement approach to deferred taxes in

accordance with AASB 1020.

The income statement approach recognizes deferred tax balances on timing

differences that, under AASB 1020, are defined as differences between pre-tax

accounting profit (loss) and taxable income (tax loss) for a given financial period. Timing

differences arise because the financial period in which some items of revenue and

expense are included in the determination of the pre-tax accounting profit (loss) does not

coincide with the financial period in which they are included in the determination of

taxable income (tax loss) (AASB 1020, paragraph 6). Under AASB 1020, a DTL arises

from a timing difference in the current period and is recognized when taxable income is

less than accounting profit. The difference is caused by the present deductibility for tax

purposes of expenses deferred for accounting purposes and/or the present non-

assessability for tax purposes of revenues included in the determination of pre-tax

accounting profit (loss) (AASB 1020, paragraph 11a). A deferred tax asset (DTA), on the

other hand, is reported as an asset to the extent that taxable income is greater than

accounting profit in the current period due to a timing difference. The difference is

caused by the present non-deductibility for tax purposes of expenses included in the

determination of accounting profit (loss) and/or the current assessability for tax purposes

8

of revenue items deferred for accounting purposes (AASB 1020, paragraph 11b). Under

the income statement approach, there are no deferred tax implications upon the upward

revaluation of assets. This is because the revaluation is taken directly to the revaluation

reserve as part of equity and does not appear on the income statement (AASB 116 –

Property, Plant and Equipment (AASB 116), paragraph 39).1

Under the balance sheet approach, deferred tax balances are computed based on

temporary differences that, in accordance with AASB 112, include: (1) differences

between the carrying amount of an asset or liability in the balance sheet and its tax base;2

and (2) differences in taxable income (tax loss) and pre-tax accounting profit (loss)

(AASB 112, paragraph 5). To the extent temporary differences impact the income

statement, the deferred tax consequences under the income statement and the balance

sheet approaches are the same. This is because the resultant discrepancies in taxable

income (tax loss) and pre-tax accounting profit (loss) would be captured as both timing

differences (under AASB 1020) and temporary differences (under AASB 112). This

would be a common occurrence and reflects that all timing differences constitute

temporary differences. It is only in those instances when temporary differences do not

flow through to the income statement that deferred taxes differ under the income

statement and balance sheet approaches. The primary example is asset revaluations taken

directly to equity. This highlights the more expansive definition of temporary differences,

as not all temporary differences under AASB 112 are timing differences under AASB

1020.

1 While the current version of AASB 116 (issued in 2012) uses the term ‘revaluation surplus’, we use the term ‘revaluation reserve’ as this is consistent with AASB 116 terminology at the time of AIFRS adoption.

2 The tax base of an asset or liability is the amount attributed to the asset or liability for tax purposes.

9

In accordance with AASB 112, a DTL is recognized for all taxable temporary

differences, which are those that result in the carrying amount of assets (liabilities) being

greater than (less than) their tax-based value (AASB 112, paragraph 15). For example, an

asset that has been revalued upwards for accounting purposes, which is not permitted

under tax law, requires a restatement of the asset’s carrying amount while the tax base of

the asset is not adjusted (AASB 112, paragraph 20). The future recovery of the carrying

amount of the asset will generate taxable income for the firm, whether through income

generated from its use or proceeds from its disposal, constituting a taxable temporary

difference and giving rise to a DTL (AASB 112, paragraph 20).

Recognition of a DTA occurs for all deductible temporary differences to the

extent that it is probable that taxable profit will be available against which the deductible

temporary difference can be utilized (AASB 112, paragraph 24). Deductible temporary

differences refer to those differences that result from the carrying amount of assets

(liabilities) being less than (greater than) their tax-based value (AASB 112, paragraph

24).

In summary, because upward revaluations are directly recorded in a revaluation

reserve there is no effect on accounting profit (or taxable income). Crediting equity

directly bypasses any deferred tax consequences under AASB 1020, while a DTL is

recognized under AASB 112. Hence, any incremental value relevant information

provided by the balance sheet approach in a revaluation environment could be partly

driven by the recognized deferred tax consequences of asset revaluations.

3. HYPOTHESIS DEVELOPMENT

10

Limited prior evidence exists on the valuation of deferred taxes within an

Australasian context. Wong et al. (2011) examine the value relevance of DTLs

recognized using comprehensive allocation, which recognizes the tax effect of all timing

differences, versus partial allocation, which recognizes the tax effect of only those timing

differences that will reverse in the foreseeable future. Using New Zealand as a setting,

where firms could choose between either procedure, Wong et al. (2011) find DTLs

recognized using partial allocation are negatively related to share prices, while DTLs

recognized using comprehensive allocation are value relevant only for a subset of low

growth firms whose DTLs will most likely result in future tax payments. Within an

Australian context, Chang et al. (2009) find that DTLs are generally unrelated to share

prices, with the market viewing DTLs as real liabilities only for loss-making, tax-

consolidating firms or firms in the materials and energy sector. Both Wong et al. (2011)

and Chang et al. (2009), however, examine DTLs calculated in accordance with the

income statement approach, with no prior Australian study considering the value

relevance of the balance sheet approach. In fact, Chang et al. (2009) call for further

investigation of the value relevance of deferred taxes determined under the balance sheet

approach of AASB 112.

We draw upon two strands of literature to formulate our assertions on the value

relevance of DTLs recognized under AASB 112. First, Ayers (1998) finds the balance

sheet approach to deferred taxes provides incremental value relevant information beyond

the income statement approach, which Ayers argues is evidence of both the effectiveness

of the standard setting process and the usefulness of the accounting information

produced. While examined in the US, where asset revaluations are not permitted, we

11

extrapolate similar findings in Australia as investors value the additional information

generated by the prescribed recognition of the deferred tax consequences of a more

comprehensive suite of temporary differences. Second, prior research finds that

Australian asset revaluations are considered value relevant by investors. Easton et al.

(1993), for example, provide evidence that the level of, and the change in, Australian

firms’ revaluation reserve significantly explain their market value, while Barth and

Clinch (1998) find that revalued PPE is positively associated with share prices for

Australian firms.

Given the scope of temporary differences under the balance sheet approach is

more encompassing than the scope of timing differences under the income statement

approach, one would expect the resultant deferred tax balance to be more informative to

investors. We contend that investors view the provision of additional information on

deferred taxes as both useful and relevant. Consistent with prior evidence that the balance

sheet approach is value relevant in a non-revaluation environment (Ayers, 1998), in

conjunction with the value relevance of asset revaluations including PPE (Easton et al.,

1993; Barth and Clinch, 1998), we, therefore, expect that the balance sheet approach of

AASB 112 will provide incremental value relevance relative to the income statement

approach of AASB 1020:

H1 The balance sheet approach of AASB 112 provides incrementally more value relevant information compared to the income statement approach of AASB 1020.

Our next research question relates specifically to the value relevance of deferred

taxes under the balance sheet approach arising from asset revaluations. The association

12

(if any) between deferred taxes and share prices reflects information provided about

firms’ future tax payments (Chaney and Jeter, 1994). Early longitudinal studies, however,

find a large portion of firms’ DTLs do not result in future tax payments (Davidson, 1958;

Wise, 1986). Using deferred taxes resulting from depreciation as an example, when firms

grow via investing in depreciable assets any reversing timing (or temporary) differences

will be offset by equal or greater originating differences, resulting in DTLs unlikely to be

settled in the foreseeable future (Jeter and Chaney, 1988; Chaney and Jeter, 1989; Chang

et al., 2009; Wong et al., 2011). Investors recognizing that “deferred taxes which arise

from predictably recurring items provide little or no information to the market” (Chaney

and Jeter, 1989, p. 11) do not incorporate these into share prices. In support, Givoly and

Hayn (1992) find that investors’ valuation of DTLs as real liabilities is discounted

according to the likelihood and timing of their settlement. Complementing such evidence,

Amir et al. (1997) find the valuation coefficient on DTLs arising from depreciation and

amortization is close to zero, which Amir et al. infer reflects investors’ expectations of

little likelihood of future reversal of DTLs and, consequently, low probability of future

tax payments. Wong et al. (2011) and Chang et al. (2009) also attribute their (lack of)

findings to the market viewing DTLs as having little relationship to future tax payments.

The upward revaluation of an asset signals a reassessment of its estimated value

(Aboody et al., 1999), with the revaluation increment reflecting the enhanced future

economic benefits the asset will generate. The restated carrying amount of the asset will

be recoverable through its continued use or subsequent disposal (Barth and Clinch, 1998),

either way triggering cash outlays to tax authorities. If the carrying amount of the asset is

expected to be recovered through its further use, the DTL from the upward revaluation

13

recognizes the income tax payable on the enhanced income-producing ability of the asset.

If the carrying amount of the asset is expected to be recovered through its disposal, the

DTL recognizes the capital gains tax payable upon disposal of the appreciated asset

(Wong, 2006). Irrespective, the recognized DTLs reflect tax obligations likely to be

settled in the future. Given the strong relationship between the DTLs and future cash

outlays to tax authorities, we contend investors view the deferred tax consequences of

asset revaluations as real liabilities when setting prices. The more expansive scope of

AASB 112, relative to AASB 1020, is primarily attributable to capturing the deferred tax

consequences of asset revaluations. To the extent the difference between AASB 112 and

AASB 1020 deferred tax balances, as per H1, is value relevant we expect the deferred

taxes attributable to asset revaluations, when disclosed as the source of such difference,

to also be value relevant. We, therefore, anticipate that investors will revise their

expectations about stock prices when dealing with deferred taxes attributed to asset

revaluations, leading to H2:

H2 The deferred tax consequences of asset revaluations, which are recognized under the balance sheet approach of AASB 112, provide value relevant information.

4. SAMPLE SELECTION AND MODEL

4.1 Sample Selection

The sample includes the largest 1000 Australian Stock Exchange (ASX) listed

firms, each with sufficient data to test both H1 and H2. Firms with no deferred tax

balance (348) were excluded, as were firms (204) that did not disclose the components

that comprise the incremental AASB 112 net deferred tax balance. Seventy-two firms

14

with missing financial statement data to calculate control variables were excluded, as

were forty-nine foreign firms who either did not adopt AASB 112 or had already adopted

the balance sheet approach under International Accounting Standard 12 Income Taxes

(IAS 12). Fifteen firms with no stock price data were excluded from the sample while,

consistent with prior valuation studies such as Burgstahler and Dichev (1997) and Barth

et al. (2008), we exclude a further 21 firms to eliminate the effect of outliers on our

findings. Table 1 summarizes the data collection procedure, which results in a final

sample of 291 firms.

[INSERT TABLE 1 ABOUT HERE]

Australian firms were required to comply with AIFRS for the 12-month reporting

period beginning on or after 1 January, 2005. In the first year of adoption firms reported

under both approaches, thereby recognizing deferred tax balances under each approach.

Firms also reconciled, by way of note disclosure, the difference between both balances.

Such reconciliation allows us to identify the sources of the difference, which represent

our deferred tax components. As deferred tax data for AASB 1020 and AASB 112 are

obtained from the same fiscal year, which is the period when AASB 112 first became

effective, our study includes firms with year-ends from June 2004 through May 2005

(that is, those adopting during the ‘2005’ year) and firms with year-ends from June 2005

through May 2006 (that is, those adopting during the ‘2006’ year). These firms do not

overlap because data regarding the impact of AASB 112 are only available in the year the

firm first adopts AIFRS. A review of firm disclosures identified four common sources of

15

difference in deferred tax balances emanating from firms’ shift from the income

statement to the balance sheet approach: (1) PPE revaluation; (2) revaluation of assets

available for sale; (3) revaluation of equity-accounted investments; and (4) the resultant

change in loss carry-forwards. As these sources of difference are due to adopting the

balance sheet approach we refer to these as balance sheet deferred tax components.

Independent of, and at the same time as, the change in approaches to accounting for

deferred taxes there were changes in accounting standards (due to the adoption of other

AIFRS) with deferred tax consequences. Such AIFRS caused changes in the deferred tax

balances independent of the balance sheet approach, with such deferred tax consequences

existing even if the income statement approach had been retained. Firms’ note disclosures

identified five income statement items with deferred tax consequences due to AIFRS

adoption: (1) stock option payments; (2) intangibles write-down; (3) lease accruals; (4)

asset impairment; and (5) revenue recognition. As these sources of difference impact the

income statement, and are independent of the adoption of AASB 112, we refer to these as

income statement deferred tax components.

Market, balance sheet, and earnings data are obtained from the FINANALYSIS

database, while deferred tax data are collected from financial statements using the

FINANALYSIS and CONNECT4 databases.

4.2 Model

Value relevance studies primarily use the accounting-based valuation model of

Ohlson (1995) and its subsequent refinement (e.g., Feltham and Ohlson, 1995). In order

to capture information about asset and liability values that are not currently recognized in

the balance sheet, accounting earnings are also included in the model (Barth, 2000). This

16

‘balance sheet valuation model’ (Holthausen and Watts, 2001) has been used in

examining the value relevance of pension assets and liabilities (Barth, 1991), investment

securities at fair value (Barth, 1994) and the revaluation of financial, tangible and

intangible assets (Barth and Clinch, 1998). Ayers (1998) also employs a similar valuation

model to determine whether SFAS 109 provides more relevant information to investors

than APB 11.

Consistent with prior research, we employ the balance sheet valuation model and

include separate variables that measure ‘actual’ deferred tax balances under the income

statement and balance sheet approaches. We also control for the fact that, relying on

information contained within the revaluation reserve, an investor could, independent of

the approach to account for deferred taxes, estimate the ‘notional’ deferred tax

consequences of asset revaluations and factor these into share prices by including a

variable that measures the ‘notional’ DTL on asset revaluations. We include book value

of equity and net income in our model, as summary measures of information reflected in

firms’ financial statements, as well as separate variables representing adjustments to

equity and profits due to the adoption of all AIFRS to control for any potential changes in

stock prices due to these adjustments. We also control for firm growth, as firm growth is

likely to be positively correlated with DTLs (Chaney and Jeter, 1994) with its omission

potentially overstating the coefficient on deferred tax balances (Chang et al., 2009).

Given the all-encompassing nature of the balance sheet approach, the AASB 112 net

deferred tax balance consists of: (1) the AASB 1020 net deferred tax balance

(AASB1020); and (2) the increment necessary to adjust a firm’s AASB 1020 net deferred

tax balance to the AASB 112 net deferred tax balance (INC112). We use equation 1 to

17

test the incremental value relevance of AASB 112, which is assessed by the coefficient of

the variable INC112:

(1)

Where Pi,t is share price for firm i at fiscal year-end;3 AASB1020 is the net

deferred tax balance for firm i at time t under AASB 1020, deflated by number of shares

outstanding; INC112 is the per share increment necessary to adjust a firm’s AASB 1020

net deferred tax balance to the AASB 112 net deferred tax balance; DTLREV_NOT is the

‘notional’ DTL on asset revaluations for firm i at time t, calculated as firm i’s year-end

revaluation reserve balance at time t multiplied by the statutory tax rate (30 percent),

deflated by the number of shares outstanding;4 BVE is the book value of equity per share

for firm i at time t excluding deferred taxes; NI is net income per share for firm i at time t;

AIFRS_EqAdj is adjustments to equity per share due to the adoption of all AIFRS for

firm i at time t; AIFRS_ProfAdj is adjustments to profits per share due to the adoption of

AIFRS for firm i at time t; GR captures firm growth and is the change in net cash flow

3 We replicate all testing using Pi,t+3, which is share price three months after fiscal year-end. Our (unreported) results are substantively unchanged by the use of this alternate measure.

4 Revaluation reserves at year-end reflect an accumulation of asset revaluations from the current and prior

periods, with the deferred tax consequences of prior period revaluations potentially reflected in historic, rather than current, share prices. To capture the value relevance of ‘notional’ DTLs on current period revaluations only, we replicate all testing using DTLREV_NOT, which is the ‘notional’ DTL on the

change in firm i’s revaluation reserve balance at time t and is measured as: (year-end revaluation reserve for firm i in time t minus year-end revaluation reserve for firm i in time t-1) multiplied by the statutory tax rate (30 percent), deflated by number of shares outstanding. Our (unreported) results are substantively unchanged by the use of this alternate measure.

18

from investing activities for firm i at time t, deflated by number of shares outstanding;

and ε is the error term.5 Consistent with Ayers (1998) and Gordon and Joos (2004),

positive (negative) values for AASB1020 indicate that a firm has a net DTL (net DTA),

while a positive (negative) value for INC112 indicate that a firm had an increase

(decrease) in net DTLs as a result of adopting AASB 112. It is quite possible that the net

numbers contain both assets and liabilities. However, we assume the signs of the net

numbers capture their relative information content. Regarding DTLREV_NOT, accurate

estimation of ‘notional’ DTLs on asset revaluations requires knowledge of the tax rate

that will be applicable when the taxable temporary difference is realized. Given future

statutory rates are not foreseeable we use the current statutory tax rate of 30 percent as a

proxy.

To the extent markets are perfect and complete, and if reported book values

measure market values without error (and assuming there are no correlated omitted

variables), the coefficient for BVE would equal one. However, those estimated

coefficients may differ from theoretical values because of potential measurement error in

BVE, cross-correlation among measurement errors and correlated omitted variables

(Venkatachalam, 1996). It is, however, noted that the potential problems of measurement

error and/or correlated omitted variables in the current and previous applications of the

balance sheet valuation model do not prevent consistent findings of significantly positive

(negative) coefficients on assets (liabilities) (e.g. Barth, 1991; 1994; Ayers, 1998; Barth

and Clinch, 1998). This evidence indicates that any existing measurement error and any

5 Consistent with prior literature (Espahbodi et al., 2002; Chang et al., 2009), we use growth in net cash from investing activities as our proxy for firm growth. While prior literature also uses growth in tangible assets as an alternate proxy (Chang et al., 2009), we do not consider this appropriate for our purposes as asset revaluations are captured in this measure.

19

correlated omitted variables do not rule out the balance sheet valuation model from

providing reasonably interpretable evidence regarding value relevance (Ayers, 1998).

To test whether the deferred tax consequences of asset revaluations, which are

recognized under the balance sheet approach of AASB 112, provide value relevant

information we relate the balance sheet valuation model as used in equation (1) with

deferred taxes attributable to each of the four (three revaluation and one non-revaluation)

balance sheet and five income statement components (DTC) as follow:

(2)

Where is a binary variable coded 1 if either the four balance sheet (namely,

PPE revaluation; revaluation of assets available for sale; revaluation of equity-accounted

investments; and loss carry-forwards) or five income statement (namely, stock option

payments; intangibles write-down; lease accruals; asset impairment; and revenue

recognition) components are disclosed as the source/s of difference between the AASB

1020 and AASB 112 deferred tax balance for firm i at time t, 0 otherwise; and ε is the

error term. All other variables are as defined previously. Deferred tax components that

have a valuation coefficient significantly different from zero will be considered value

relevant.

20

Finally, we examine the differential value relevance of deferred taxes attributable to

asset revaluations relative to income statement deferred tax effects, both irrespective of

type:

(3)

Where is a binary variable coded 1 if any of three asset revaluation

components (that is, PPE revaluation; revaluation of assets available for sale; revaluation

of equity-accounted investments) are disclosed as a source of difference between the

AASB 1020 and AASB 112 deferred tax balance for firm i at time t, 0 otherwise; and

is a binary variable coded 1 if any of the five income statement components

are disclosed as a source of difference between the AASB 1020 and AASB 112 deferred

tax balance for firm i at time t, 0 otherwise. If the valuation coefficient of the revaluation

components’ variable (REVCOMP) is significantly higher than that of the income

statement components’ variable (ISCOMP) it will be considered incrementally value

relevant.

5. RESULTS

5.1 Descriptive Statistics

The descriptive statistics for variables, including net deferred tax balances under

both AASB 1020 and AASB 112 and the sources of difference between these balances,

are reported in Table 2.

21

[INSERT TABLE 2 ABOUT HERE]

In Panel A, the stock price (P) ranges from 0.030 to 53.75 with a mean (median) of

3.013 (1.385). Firms, on average, appear to have net DTLs under both AASB 1020 and

AASB 112 (mean = 0.012 and 0.035, respectively). The larger average net DTL for

AASB112 is consistent with the broader coverage of the balance sheet approach under

AASB 112 (e.g., asset revaluations) compared with the income statement approach under

AASB 1020. The mean (median) of DTLREV_NOT is 0.030 (0.000), while the mean

(median) of BVE after excluding deferred taxes is 1.546 (0.743). The mean (median) of

NI is 0.253 (0.117) suggesting that the sample primarily includes profitable firms. The

mean (median) of AIFRS_EqAdj is -0.169 (-0.006), which indicates that, in accordance

with the transition requirement of AASB 1 First-time Adoption of Australian Equivalents

to International Financial Reporting Standards, firms have made adjustments resulting in

a decrease in total equity. However, adjustments to the income statement result in an

increase in profit given the mean (median) of 0.008 (0.001) for AIFRS_ProfAdj.

Coinciding with first-time adoption of AIFRS, firms experience, on average, positive

growth (mean of 0.068).

In relation to deferred tax components, Panel B indicates that 22.3 percent of firms

disclose asset revaluations as a source of difference between the AASB 1020 and AASB

112 deferred tax balances, comprising PPE revaluations (10.3 percent) and the

revaluation of assets available for sale (5.7 percent) and equity-accounted investments

(6.3 percent).

22

5.2 Correlation Matrix

Table 3 presents Pearson correlation coefficients as measures of the association

between continuous variables and Phi coefficients as measures of the association between

binary variables, as they relate to equation 1 (Panel A) and equation 2 (Panel B).

[INSERT TABLE 3 ABOUT HERE]

In Panel A, there is a positive correlation between AASB1020 and AASB112

(coefficient = 0.60; p-value ≤ .01), which reflects the overlap in accounting for deferred

taxes under the alternative approaches given all timing differences under the income

statement approach are temporary differences under the balance sheet approach. There is

also a positive correlation between AASB112 and INC112 (coefficient = 0.79; p-

value ≤ .01), which is consistent with the fact that INC112 is a component of AASB112.

As expected, BVE (coefficient = 0.81; p-value ≤ .01) and NI (coefficient = 0.85; p-

value ≤ .01) are positively correlated with P. Despite these, and other, high levels of

correlation, in our regression analysis each variance inflation factor is less than five,

which is well below the threshold of ten that prior literature cites for determining whether

a variable is collinear with other variables in the model (see, for example, Kennedy,

2003).

In regard to deferred tax components, Panel B shows that stock option payments

(SOP) are positively correlated with P (coefficient = 0.17; p-value ≤ .05) and BVE

(coefficient = 0.18; p-value ≤ .05) and negatively correlated with NI (coefficient = -0.19;

p-value ≤ .05). Asset impairment (ASS) is positively correlated with revaluations of

23

equity-accounted investments (EAI) (coefficient = 0.15; p-value ≤ .05) and lease accruals

(LEA) (coefficient = 0.31; p-value ≤ .01), suggesting that those firms with impaired assets

also have revalued equity investments and lease accruals.

5.3 Regression Results

Table 4 reports the results from examining the incremental value relevance

(INC112) of AASB 112 relative to AASB 1020. INC112 is the amount that adjusts the

balance of deferred taxes under the income statement approach of AASB 1020 to derive

the required balance under the balance sheet approach of AASB 112. The overall

adjusted R2 for equation 1 is 78 percent. For comparison, value relevance studies have

reported similar adjusted R2 of 78 percent (Barth and Beaver, 1996), 82 percent (Barth

and Clinch, 1998) and 85 percent (Venkatachalam, 1996).

[INSERT TABLE 4 ABOUT HERE]

There are three key findings in Table 4 relating to the valuation of deferred taxes.

First, the negative coefficient on DTLREV_NOT provides evidence that ‘notional’ DTLs

on asset revaluations impact firm value (t-statistic = -1.68; p-value = .09). This result

indicates that investors are able to estimate the deferred tax consequences of asset

revaluations independent of the balance sheet approach and view these as real liabilities

in price setting.

Second, the coefficient for AASB1020, whilst negative, is not significant (t-statistic

= -1.52; p-value = .12) and is consistent with firms’ deferred tax balances reported under

the income statement approach not being value relevant. This finding is consistent with

24

prior Australian findings (Chang et al., 2009) and reflects the market’s view that DTLs

bear little relationship to future tax payments due to recurring timing differences that fail

to materialize (Jeter and Chaney, 1988; Chaney and Jeter, 1989).

Third, even after controlling for investors’ ability to estimate ‘notional’ DTLs on

asset revaluations, the increment in ‘actual’ deferred tax balances upon adopting the

balance sheet approach is associated with firm value, as evidenced by the significant

negative coefficient on INC112 (t-statistic = -2.73; p-value = .00). This finding suggests

that the broader scope of AASB 112 relative to AASB 1020 is value relevant, as the

resultant deferred taxes computed under AASB 112 provide value relevant information

above and beyond that of AASB 1020. As such, investors attach value to additional

information firms are now prescribed to provide about the deferred tax consequences of

an expanded set of temporary differences. This result supports H1 and is consistent with

prior studies finding that, in a non-revaluation environment, the balance sheet approach

provides incremental information content to investors relative to the income statement

approach (Ayers, 1998). Table 4 also reports that the coefficients for BVE (t-statistic =

4.60; p-value = .00), NI (t-statistic = 3.76; p-value = .00), AIFRS_ProfAdj (t-statistic = -

2.05; p-value = .04) and GR (t-statistic = 2.47; p-value = .02) are significant.

To extrapolate the results of Table 4, it is necessary to examine the sources of

difference between the deferred tax balances of AASB 1020 and AASB 112 and their

value relevance. Doing so enables us to isolate the deferred tax components driving the

value relevance of INC112. The results from an examination of nine deferred tax

components, categorized as either balance sheet or income statement-related, are reported

in Table 5.

25

[INSERT TABLE 5 ABOUT HERE]

Results reported in Table 5 indicate that the stock price association with BVE (t-

statistic = 5.04; p-value = .00) and NI (t-statistic = 4.05; p-value = .00) remain significant.

Regarding the value relevance of the four balance sheet deferred tax components,

disclosure of the deferred tax attributable to the non-revaluation component (loss carry-

forwards) is not significant (t-statistic = 0.47; p-value = .64) while, of the revaluation

components, the disclosure that deferred taxes attributable to PPE revaluations are a

component of INC112 (t-statistic = -2.02; p-value = .04) is significantly value relevant.

Examination of the value relevance of deferred tax components attributable to the five

income statement components indicates that only deferred tax attributable to stock option

payments is significantly value relevant (t-statistic = 1.96; p-value = .06). Thus,

disclosing that the deferred tax consequences of PPE revaluations are a source of

difference between reported net DTLs under AASB 1020 and AASB 112, thereby being a

component of INC112, provides value relevant information to investors and supports H2.

When considered in conjunction with the findings in Table 4, these results indicate that

the balance sheet approach provides investors with incremental information content

beyond the income statement approach due to the inclusion of the deferred tax effects of

asset (in particular, PPE) revaluations. We infer from these findings that investors price

the component of INC112 attributable to DTLs arising from PPE revaluations as

analogous to a liability that is likely to be settled.

26

In Table 6, we report the results from an examination of the value relevance of

disclosing the deferred taxes attributable to the aggregate (three) revaluation components

and the aggregate (five) income statement components that comprise INC112. Doing so

allows us to isolate the differential value relevance of disclosing the components of

INC112 attributable to asset revaluations relative to income statement items.

[INSERT TABLE 6 ABOUT HERE]

While the results for the control variables remain similar to those reported in Table

5, the results relating to deferred tax disclosures indicate that disclosing that deferred

taxes on revaluations, irrespective of type, are a source of difference within INC112 is

significant at the five percent level (t-statistic = -2.00; p-value = .05). This is compared to

the value relevance of disclosing that deferred taxes on income statement items are a

component of INC112, which is significant at the ten percent level (t-statistic = 1.92; p-

value = .06). Consistent with our expectations, these findings indicate that investors

perceive DTLs arising from asset revaluations as having a stronger relationship to future

tax payments than DTLs attributable to income statement items and, as such, contribute

significantly to investors’ securities pricing decisions and more so than the income

statement items. In conjunction with H1, our overall findings indicate that the balance

sheet approach is incrementally value relevant relative to the income statement approach,

which is directly attributable to information on the deferred tax consequences of asset

revaluations.

6. SENSITIVITY ANALYSIS

27

To examine the value relevance of deferred tax components, Amir et al. (1997)

employ a variant of the Feltham and Ohlson (1995) model. Feltham and Ohlson (1995)

present a model in which market value of equity equals the recorded book value of

shareholders’ equity plus unrecorded goodwill. Amir et al. (1997) decompose book value

of equity into: net operating assets (NOA); net financial assets (NFA); and deferred taxes.

Under the assumption of ‘clean surplus accounting’, Amir et al. also assert unrecorded

goodwill is equal to the present value of expected future abnormal earnings (AE). To

control for cross-sectional variation in earnings persistence, Amir et al. (1997) add lagged

abnormal operating earnings (LAE) to the model. As part of our sensitivity analysis, and

consistent with Amir et al. (1997), we employ the following model to examine the value

relevance of specific deferred tax components:

(4)

Where NFA is cash and cash equivalents minus long-term debt and current portion

of long-term debt for firm i at time t; NOA is book value of shareholders’ equity minus

NFA plus deferred taxes for firm i at time t (in this instance, consistent with Amir et al.

(1997) (see p. 605) net DTAs are coded as positive numbers and net DTLs coded as

negative numbers); AE is, for firm i, earnings before interest and tax (EBIT) at time t

minus EBIT at time t-1 (with profits coded as positive numbers and losses as negative

numbers); LAE is, for firm i, EBIT at time t-1 minus EBIT at time t-2. All of the above

28

variables are deflated by the number of shares outstanding. and ε are as defined

previously.

Where accounting is unbiased, the coefficients on both NOA and NFA should equal

one. Conservative accounting, however, implies a coefficient greater than one for both

NOA and NFA. Unequal coefficients for NOA and NFA indicate varying conservatism in

accounting for operating and financial assets. A lack of persistence of abnormal operating

earnings over time implies a coefficient on AE close to zero (Amir et al., 1997).

Irrespective, deferred tax components with a coefficient significantly different from zero

will be considered value relevant. Results are reported in Table 7.

[INSERT TABLE 7 ABOUT HERE]

Results in Table 7 indicate that NOA (t-statistic = 9.03; p-value = .00), NFA (t-

statistic = 6.37; p-value = .00) and LAE (t-statistic = 3.58; p-value = .00) are all highly

significant in their association with share price. This is consistent with prior literature

(Amir et al., 1997; Amir and Sougiannis, 1999), suggesting that these accounting

measures are relevant in equity valuation. AE, however, is significant at a lower level (t-

statistic = 1.84; p-value = .07).

In reporting the value relevance attributed to each deferred tax component, Table 7

indicates that disclosure of deferred taxes attributable to both PPE revaluations (t-statistic

= -2.38; p-value = .02) and revaluations of equity-accounted investments (t-statistic = -

2.13; p-value = .07) are significantly value relevant. Read in conjunction with the

findings in Table 5, these results further support H2 by providing evidence that disclosing

29

the deferred tax consequences of asset revaluations (specifically, revaluations of PPE and

equity-accounted investments) as a source of difference between AASB 1020 and AASB

112 deferred tax balances provides incremental value relevant information to investors.

Disclosure of deferred taxes attributable to stock option payments remains the sole

income statement component significantly value relevant (t-statistic = 3.18; p-value =

.00).

We also extend the model employed in Amir et al. (1997) to examine the

differential value relevance of disclosing deferred taxes attributable to asset revaluations

relative to income statement deferred tax effects:

(5)

All variables are as defined previously. Once again, a significantly higher

coefficient on the revaluations variable (REVCOMP) compared to the income statement

variable (ISCOMP) indicates that asset revaluations contribute to the incremental value

relevance of the balance sheet approach. Results are reported in Table 8.

[INSERT TABLE 8 ABOUT HERE]

The results for control variables are consistent with those reported in Table 7, while

deferred tax disclosure results indicate that the revaluations variable is highly significant

and more so than the income statement variable. In particular, the value relevance of

30

disclosing that INC112 comprises deferred taxes on asset revaluations of any type (t-

statistic = -2.41; p-value = .02) is more significant than disclosing INC112 is composed

of deferred taxes on income statement items, irrespective of type (t-statistic = 1.74; p-

value = .08). While consistent with the findings in Table 6, the differential in significance

across both variables is greater and strongly supports the argument that deferred tax on

asset revaluations influences the setting of securities’ prices and does so more than

deferred tax on income statement items.

7. CONCLUSION

Accounting standards are costly to promulgate and are primarily designed for the

purpose of increased quality of information reported in financial statements. Given the

balance sheet approach of AASB 112 is designed to encompass broader deferred tax

effects of financial statement items, thereby providing a more inclusive picture of a firm

to its users, it is important to examine whether the new accounting standard has created

value for a specific user, namely investors.

We examine the incremental value relevance of AASB 112 relative to the income

statement approach of its predecessor, AASB 1020. Furthermore, we investigate the

value relevance of the sources of divergence between deferred tax balances under AASB

1020 and AASB 112, categorized into four balance sheet (three revaluation and one non-

revaluation) and five income statement components. Our results suggest that incremental

deferred taxes under AASB 112 have value relevance. Moreover, evidence from an

examination of the deferred tax components that comprise the divergent deferred tax

balances indicates that the disclosure of deferred taxes attributable to two out of three

revaluation components (namely, revaluations of PPE and equity-accounted investments)

31

is significantly value relevant, while the disclosure of deferred taxes attributable to the

non-revaluation balance sheet component is not significant. From the five income

statement components, only the disclosure of deferred taxes attributable to one

component (namely, stock option payments) is significant.

Overall, these results indicate that the incremental value relevance of the balance

sheet approach is attributable to the deferred tax consequences of asset revaluations,

which went unrecognized under AASB 1020. In support of this assertion, further tests

suggest that the disclosure of deferred taxes attributable to asset revaluations of any type

has greater relevance in setting securities’ prices than the disclosure of deferred taxes

attributable to income statement items, irrespective of type. By emphasizing the deferred

tax consequences of asset revaluations, these results complement existing literature on the

value relevance of deferred taxes including the value relevance of alternate approaches to

accounting for, and the components of, deferred taxes as well as prior research on the

value relevance of revalued assets, specifically PPE.

32

REFERENCES

Aboody, D., Barth, M., Kasznik, R., 1999. Revaluations of fixed assets and future firm performance: Evidence from the UK. Journal of Accounting and Economics 26, 149-178.

Accounting Principles Board, 1967. Opinion No. 11: Accounting for Income Taxes.

Norwalk: APB. Amir, E., Harris, T., Venuti, E., 1993. A comparison of the value relevance of U.S.

versus non-U.S. GAAP accounting measures using Form 20-F reconciliations. Journal of Accounting Research 31, 230-264.

Amir, E., Kirschenheiter, M., Willard, K., 1997. The valuation of deferred taxes.

Contemporary Accounting Research 14, 597-622. Amir, E., Sougiannis, T., 1999. Analysts' interpretation and investors' valuation of tax

carryforwards. Contemporary Accounting Research 16, 1-33. Australian Accounting Standard Board, 1989. AASB 1020: Accounting for Income Tax

(Tax-effect Accounting). Melbourne: AASB. Australian Accounting Standards Board, 2004. AASB 1: First-time Adoption of

Australian Equivalents to International Financial Reporting Standards. Melbourne: AASB.

Australian Accounting Standards Board, 2004. AASB 112: Income Taxes. Melbourne:

AASB. Australian Accounting Standards Board, 2006, AASB 116: Property, Plant and

Equipment. Melbourne: AASB. Ayers, B., 1998. Deferred tax accounting under SFAS No. 109: An empirical

investigation of its incremental value-relevance relative to APB No. 11. The Accounting Review 73, 195-212.

Barth, M., 1991. Relative measurement errors among alternative pension asset and

liability measures. The Accounting Review 66, 433-63. Barth, M., 1994. Fair value accounting: Evidence from investment securities and the

market valuation of banks. The Accounting Review 69, 1-25. Barth, M., 2000. Valuation-based accounting research: Implications for financial

reporting and opportunities for future research. Accounting and Finance 40, 7-31.

33

Barth, M., Beaver, W., 1996. Value-relevance of banks' fair value disclosures under SFAS No. 107. The Accounting Review 71, 513-537.

Barth, M., Clinch, G., 1998. Revalued financial, tangible, and intangible assets:

Associations with share prices and non-market-based value estimates. Journal of Accounting Research 36, 199-233.

Barth, M., Hodder, L., Stubben, S., 2008. Fair value accounting for liabilities and own

credit risk. The Accounting Review 83, 629-664. Beaver, W., Dukes, R., 1972. Interperiod tax allocation, earnings expectations and the

behavior of security prices. The Accounting Review 47, 320-332. Burgstahler, D., Dichev, I., 1997. Earnings, adaptation and equity value. The Accounting

Review 72, 187-215. Chaney, P., Jeter, D., 1989. Accounting for deferred taxes: Simplicity? Usefulness?

Accounting Horizons 3, 3-16. Chaney, P., Jeter, D., 1994. The effect of deferred taxes on security prices. Journal of

Accounting, Auditing and Finance 9, 91-116. Chang, C., Herbohn, K., Tutticci, I., 2009. Market’s perception of deferred tax accruals.

Accounting and Finance 49, 645-673. Citron, D., 2001. The valuation of deferred taxation: Evidence from the UK partial

provision approach. Journal of Business Finance and Accounting 28, 821-852. Davidson, S., 1958. Accelerated depreciation and the allocation of income taxes. The

Accounting Review 33, 173-180. Easton, P., Eddey, P., Harris, T., 1993. An investigation of revaluations of tangible long-

lived assets. Journal of Accounting Research 31, 1-38. Espahbodi, H., Espahbodi, P., Rezaee, Z., Tehranian, H., 2002. Stock price reaction and

value relevance of recognition versus disclosure: The case of stock-based compensation. Journal of Accounting and Economics 33, 343-373.

Feltham, G., Ohlson, J., 1995. Valuation and clean surplus accounting for operating and

financial activities. Contemporary Accounting Research 11, 689-731. Financial Accounting Standard Board, 1992. Statement of Financial Accounting

Standards No. 109: Accounting for Income Taxes. Norwalk: FASB. Givoly, D., Hayn, C., 1992. The valuation of the deferred tax liability: Evidence from the

stock market. The Accounting Review 67, 394-410.

34

Gordon, E., Joos, P., 2004. Unrecognized deferred taxes: Evidence from the U.K. The

Accounting Review 79, 97-124. Guenther, D., Sansing, R., 2000. Valuation of the firm in the presence of temporary

book-tax differences: The role of deferred tax assets and liabilities. The Accounting Review 75, 1-12.

Guenther, D., Sansing, R., 2004. The valuation relevance of reversing deferred tax

liabilities. The Accounting Review 79, 437-451. Holthausen, R., Watts, R., 2001. The relevance of the value-relevance literature for

financial accounting standard setting. Journal of Accounting and Economics 31, 3-75.

Jeter, D., Chaney, P., 1988. A financial statement analysis approach to deferred taxes.

Accounting Horizons 2, 41-50. Kennedy, P., 2003. A Guide to Econometrics. 5th edition. Oxford UK: Blackwell

Publishing Ltd. Lynn, S., Seethamraju, C., Seetharaman, A., 2008. Incremental value relevance of

unrecognized deferred taxes: Evidence from the United Kingdom. Journal of the American Taxation Association 30, 107-130.

Ohlson, J., 1995. Earnings, book values, and dividends in equity valuation.

Contemporary Accounting Research 11, 661-687. Venkatachalam, M., 1996. Value-relevance of banks' derivatives disclosures. Journal of

Accounting and Economics 22, 327-355. White, H., 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct

test for heteroskedasticity. Econometrica 48, 817-838. Wise, T., 1986. A note on additional evidence on the behavior of deferred tax credits.

Journal of Business, Finance and Accounting 13, 433-444. Wong, N., 2006. Accounting for deferred taxes under NZ IAS 12. University of

Auckland Business Review 8, 55-59. Wong, J., Wong, N., Naiker, V., 2011. Comprehensive versus partial deferred tax

liabilities and equity market values. Accounting and Finance 51, 1-20.

35

TABLE 1 Sample Selection

Initial Sample 1000Less: Firms with no deferred tax balance 348 Firms with missing deferred tax component disclosures 204 Firms with missing financial statement data on controls 72 Foreign firms not adopting AASB 112 or already adopting IAS 12 49

Firms with missing share price data 15

Firms with extreme observations 21 Final sample 291

36

TABLE 2 Descriptive Statistics

Variables Mean Q1 Median Q3 Std.

Deviation Minimum Maximum

Panel A: (per share basis) P 3.013 0.650 1.385 3.073 5.516 0.030 53.750AASB1020 0.012 -0.015 0.000 0.008 0.119 -0.419 0.883AASB112 0.035 -0.018 -0.001 0.026 0.196 -0.435 2.094INC112 0.022 -0.005 0.000 0.007 0.156 -0.364 2.093DTLREV_NOT 0.030 0.000 0.000 0.000 0.183 0.000 2.747BVE 1.546 0.301 0.743 1.607 2.537 -0.067 25.452NI 0.253 0.039 0.117 0.308 0.482 -0.548 4.430AIFRS_EqAdj -0.169 -0.111 -0.006 0.005 0.637 -5.831 1.412AIFRS_ProfAdj 0.008 -0.003 0.001 0.014 0.059 -0.338 0.258GR 0.068 -0.026 0.000 0.089 1.082 -8.619 7.105Panel B: (binary basis) Deferred Tax Components: PPE 0.103 0.000 0.000 0.000 0.305 0.000 1.000AAS 0.057 0.000 0.000 0.000 0.233 0.000 1.000EAI 0.063 0.000 0.000 0.000 0.244 0.000 1.000CFD 0.126 0.000 0.000 0.000 0.333 0.000 1.000SOP 0.069 0.000 0.000 0.000 0.254 0.000 1.000INT 0.080 0.000 0.000 0.000 0.273 0.000 1.000LEA 0.086 0.000 0.000 0.000 0.281 0.000 1.000ASS 0.092 0.000 0.000 0.000 0.290 0.000 1.000REV 0.057 0.000 0.000 0.000 0.233 0.000 1.000

Where P is share price at fiscal year-end; AASB1020 is net deferred tax balance per share under AASB 1020, where positive (negative) values indicate a net DTL (net DTA); AASB112 is net deferred tax balance per share under AASB 112, where positive (negative) values indicate a net DTL (net DTA); INC112 is the per share increment necessary to adjust a firm’s AASB1020 net deferred tax balance to the AASB 112 net deferred tax balance, where positive (negative) values indicate an increase (decrease) in net DTLs or a decrease (increase) in net DTAs; DTLREV_NOT is the ‘notional’ DTL on asset revaluations per share, measured as year-end revaluation reserve balance multiplied by the statutory tax rate (30 percent), deflated by number of shares outstanding; BVE is book value of equity per share exclusive of deferred taxes; NI is net income per share; AIFRS_EqAdj is the adjustment to equity upon the adoption of AIFRS, per share; AIFRS_ProfAdj is the adjustment to profit upon the adoption of AIFRS, per share; GR is the change in net cash flow from investing activities, deflated by number of shares outstanding; and each deferred tax component is a binary variable that takes the value of 1 if disclosed as a source of difference between the deferred tax balances of AASB 1020 and AASB 112, 0 otherwise. The nine deferred tax components are identified by the following abbreviations: PPE revaluation (PPE); revaluation of assets available for sale (AAS); revaluation of equity-accounted investments (EAI); loss carry-forwards (CFD); stock option payments (SOP); intangibles write-down (INT); lease accruals (LEA); asset impairment (ASS); and revenue recognition (REV).

37

Panel B: Equation 2 P BVE NI AIFRS_

EqAdj AIFRS_ ProfAdj

GR PPE AAS EAI CFD SOP INT LEA ASS REV

P 1 BVE 0.81 1 NI 0.85 0.78 1 AIFRS_ EqAdj

-0.06 0.06 0.07 1

AIFRS_ ProfAdj

-0.02 0.03 0.02 0.03 1

GR 0.18 0.12 0.09 0.02 0.01 1 PPE 0.05 0.08 -0.07 0.01 0.07 -0.09 1 AAS 0.02 -0.03 0.06 -0.01 0.04 -0.08 0.00 1 EAI 0.03 0.08 -0.03 -0.07 0.03 0.20 -0.09 0.04 1 CFD -0.11 -0.11 0.08 -0.05 -0.04 0.00 -0.07 0.05 0.04 1 SOP 0.17 0.18 -0.19 0.03 0.03 0.02 0.06 -0.07 -0.07 -0.04 1 INT -0.05 -0.06 0.04 -0.10 -0.04 -0.00 -0.03 0.02 0.01 0.01 -0.08 1 LEA -0.04 -0.06 0.05 -0.02 -0.03 -0.06 -0.04 -0.08 -0.08 -0.06 -0.08 0.11 1 ASS -0.06 -0.06 0.07 -0.02 -0.11 0.07 -0.05 0.09 0.15 -0.07 -0.01 0.11 0.31 1 REV -0.05 -0.05 0.03 -0.13 0.07 -0.05 0.00 -0.06 0.14 -0.09 -0.07 -0.07 0.10 0.00 1

All variables are as defined in Table 2. Correlations significant at the 5 percent level (or below) are shown in bold.

TABLE 3 Pearson/Phi Correlation Coefficients

Panel A: Equation 1 P AASB1020 AASB112

INC112

DTLREV_NOT

BVE NI AIFRS_ EqAdj

AIFRS_ ProfAdj

GR

P 1

AASB1020 -0.01 1 AASB112 0.14 0.60 1 INC112 0.18 -0.01 0.79 1 DTLREV_NOT -0.07 -0.13 -0.09 -0.02 1 BVE 0.81 0.10 0.45 0.48 -0.09 1 NI 0.85 0.02 0.10 0.00 -0.10 0.78 1 AIFRS_EqAdj 0.06 -0.07 0.00 0.05 -0.06 0.06 0.07 1 AIFRS_ProfAdj -0.02 0.08 0.04 -0.01 -0.08 0.03 0.02 0.03 1 GR 0.18 -0.03 -0.08 -0.09 -0.00 0.12 0.09 0.02 0.01 1

38

TABLE 4

Regression of share price on deferred tax balance as per AASB 1020 (AASB1020), the deferred tax balance increment as per AASB 112 (INC112)

and financial statement measures

Independent Variables

Estimate t-statistic p-value

Intercept 0.10 0.45 0.64AASB1020 -2.88 -1.52 0.12INC112 -4.78 -2.73 0.00***DTLREV_NOT -2.30 -1.68 0.09*BVE 1.10 4.60 0.00***NI 5.32 3.76 0.00***AIFRS_EqAdj 0.07 1.02 0.30AIFRS_ProfAdj -4.13 -2.05 0.04**GR 0.05 2.47 0.02**

n 291

Adjusted R2 0.78 F-test 126.52 (p-value ≤ .01) All variables are as defined in Table 2. t-statistics and significance levels are based on White (1980) standard errors. *, ** and *** indicate significance at the ten, five and one percent levels, respectively (two-tailed).

39

TABLE 5 Regression of share price on individual deferred tax components (DTC) and

financial statement measures

Independent Variables Estimate t-statistic p-valueIntercept 0.14 0.55 0.59BVE 0.86 5.04 0.00***NI 6.11 4.05 0.00***AIFRS_EqAdj 0.07 0.76 0.45AIFRS_ProfAdj -3.48 -1.54 0.13GR 0.03 1.09 0.28Balance sheet components PPE revaluation -1.26 -2.02 0.04**Revaluation of assets available for sale 0.13 0.17 0.86Revaluation of equity-accounted investments -1.02 -0.98 0.33Loss carry-forwards 0.18 0.47 0.64Income statement components Stock option payments 1.98 1.96 0.06*Intangibles write-down 0.86 0.91 0.36Lease accruals 0.17 0.32 0.75Asset impairment -0.57 -1.19 0.24Revenue recognition 0.36 0.55 0.58 n 291 Adjusted R2 0.77 F-test 58.38 (p-value ≤ .01) All variables are as defined in Table 2. t-statistics and significance levels are based on White (1980) standard errors. *, ** and *** indicate significance at the ten, five and one percent levels, respectively (two-tailed).

40

TABLE 6 Regression of share price on deferred tax components, classified as

balance sheet (BSCOMP) or income statement (ISCOMP) related, and financial statement measures

Independent Variables Estimate t-statistic p-valueIntercept 0.11 0.43 0.67BVE 0.85 5.09 0.00***NI 6.20 4.27 0.00***AIFRS_EqAdj 0.07 0.81 0.42AIFRS_ProfAdj -3.43 -1.59 0.11GR 0.03 1.05 0.29REVCOMP -1.06 -2.00 0.05**ISCOMP 0.73 1.92 0.06* n 291 Adjusted R2 0.75 F-test 116.95 (p-value ≤ .01)

Where REVCOMP is a binary variable that takes the value of 1 if asset revaluation components (namely, PPE, AAS and EAI) are disclosed as a source of difference between the net deferred tax balances of AASB 1020 and AASB 112, 0 otherwise; and ISCOMP is a binary variable that takes the value of 1 if income statement components (namely, SOP, INT, LEA, ASS, REV) are disclosed as a source of difference between the net deferred tax balances of AASB 1020 and AASB 112, 0 otherwise. All other variables are as defined in Table 2. t-statistics and significance levels are based on White (1980) standard errors. *, ** and *** indicate significance at the ten, five and one percent levels, respectively (two-tailed).

41

TABLE 7

Regression of share price on individual deferred tax components (DTC) and financial statement measures as identified in Amir et al. (1997)

Independent Variables

Estimate t-statistic p-valueIntercept 0.35 1.30 0.19NOA 1.50 9.03 0.00***NFA 1.45 6.37 0.00***AE 3.28 1.84 0.07*LAE 12.68 3.58 0.00***Balance sheet components PPE revaluation -1.33 -2.38 0.02**Revaluation of assets available for sale 0.06 0.04 0.97Revaluation of equity-accounted investments

-2.15

-2.13

0.07*

Loss carry-forwards -0.27 -0.55 0.58Income statement components Stock option payments 2.73 3.18 0.00***Intangibles write-down 0.17 0.28 0.78Lease accruals 0.63 0.91 0.36Asset impairment 0.43 0.81 0.42Revenue recognition -0.28 -0.34 0.73 n 291 Adjusted R2 0.77 F-test 41.91 (p-value ≤ .01) Where NFA is cash and cash equivalents minus long-term debt and current portion of long-term debt; NOA is book value of shareholders’ equity minus NFA plus deferred taxes, where net DTAs (net DTLs) are positive (negative) values; AE is earnings before interest and tax (EBIT) at time t minus EBIT at time t-1, where profits (losses) are positive (negative) values; and LAE is EBIT at time t-1 minus EBIT at time t-2. All variables are scaled by the number of shares outstanding. All other variables are as defined in Table 2. t-statistics and significance levels are based on White (1980) standard errors. *, ** and ***indicate significance at the ten, five and one percent levels, respectively (two-tailed).

42

TABLE 8

Regression of share price on deferred tax components, classified as balance sheet (BSCOMP) or income statement (ISCOMP) related, and financial statement

measures as identified in Amir et al. (1997)

Independent Variables

Estimate

t-statistic p-valueIntercept 0.43 1.24 0.22NOA 1.51 8.84 0.00***NFA 1.44 6.19 0.00***AE 3.67 2.13 0.03**LAE 12.90 3.64 0.00***REVCOMP -1.45 -2.41 0.02**ISCOMP 0.72 1.74 0.08* n 291 Adjusted R2 0.76 F-test 129.93 (p-value ≤ .01) All variables are as defined in Tables 2 and 7. t-statistics and significance levels are based on White (1980) standard errors. *, ** and ***indicate significance at the ten, five and one percent levels, respectively (two-tailed).