Introduction
The chosen study by Laux examines the association between deferred tax assets and liabilities and future tax payments. The author’s hypotheses are based on previous literature, and the findings suggest that an asymmetrical correlation between deferred tax figures and future tax payments in the reviewed firm (Laux 1357). This study serves to empirically validate the prior theoretical assumptions, thus offering a new perspective on the research of deferred tax assets and liabilities.
The author also states that the study could potentially impact accounting standard-setters, as it identifies a significant gap in the ASC 740 (Laux 1381). The present paper aims to provide a summary of the research study and to speculate on its significance to further research.
Summary
Using financial statements information, the author performs an empirical analysis by conducting a cross-sectional regression analysis of future tax payments based on current taxes payable and the deferred tax variables. The findings are asymmetrical, with significant variations between deferred tax variables included in GAAP income before and after taxable income (Laux 1359). For instance, the deferred tax variable included in GAAP prior to taxable income correlates with future tax payments, whereas the figures included in GAAP income after taxable income do not (Laux 1359). The second part of the research also found that investors tend to value deferred tax assets and liabilities included in GAAP income prior to taxable income (Laux 1359).
Importance
The introductory part of the paper serves to identify the theoretical basis for the empirical study. For instance, the author reviews a variety of theoretical assumptions offered by previous studies. Laux notes that there is a significant conflict within the research community on the question of whether or not deferred tax assets and liabilities might be used to predict future tax payments (1358). Therefore, the study serves to provide empirical support for the previous assumptions.
The author also establishes the significance of the research question, explaining that determining the presence of a strong association between deferred taxes and future tax payments could be used to improve the current financial accounting standards (Laux 1358). According to Laux, accounting for the deferred taxes is a complicated and costly procedure, whereas the FASB “is obligated to consider whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information” (1358). Therefore, determining the usefulness of deferred tax accounting in providing financial predictions could help to improve the standards.
Conclusion
Overall, the study provides some important insights into the accounting theory and standards. However, there are some questions on the topic that were not addressed in the research. For instance, if the deferred tax assets and liabilities included in GAAP income before taxable income are more valuable than those included in taxable income, would there be any way to use just those figures for tax payment predictions? Also, since the author notes that the results cannot be generalized to firms outside of the scope of the present research (Laux 1382), what are the firm characteristics that make the research results applicable to a firm?
These questions could be addressed in further research on the topic, as they would help to complete the empirical results achieved by the author. Further research on the association between deferred tax variables and future tax payments could be used to inform the standards of accounting reporting, making the procedure more cost-effective and useful.
Works Cited
Laux, Rick C. “The Association between Deferred Tax Assets and Liabilities and Future Tax Payments.” The Accounting Review, vol. 88, no. 4, 2013, pp. 1357-1383.