Deferred Taxes and the Liability Concept – Current Liabilities

Present financial reporting standards emphasize that deferred tax obligations are liabilities. In some respects, however, the manner in which deferred tax obligations are classified and measured is inconsistent with liability reporting.

Generally, business liabilities are classified as current or noncurrent based on the length of time to repayment. Deferred tax obligations, in contrast, are classified based on the current versus noncurrent classification of the related asset. Depreciating assets are classified as noncurrent assets, for example, and the related deferred tax obligations are also classified as noncurrent for this reason. Accounting literature does not provide any compelling reason for this practice.

Generally, long-term obligations are reported at their present values; in other words, the future payments are discounted to the present at an appropriate rate of interest. Deferred tax obligations are not discounted, however, even in cases where the temporary differences are not expected to reverse for many years. Consequently, managers and investment analysts often argue that the amounts reported as deferred tax obligations are substantial overstatements of these liabilities’ economic value.

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