The Recognition Of Deferred Tax Assets And The Earnings Management

The Accounting Standards for Business Enterprises issued on 15 February 2006 substantially converged with International Financial Reporting Standards. The problems switching from the previous accounting standards to the new one and implementation effects have been generally concerned by regulators, scholors and professionals. As to the standard of Income Tax, whether the future earnings prediction upon which deferred tax assets is fully recognized and reliable? Can the future economic benefits of deferred tax assets flow into the company? Do listed companies use the recognition in terms of deferred tax assets as an overstating earnings tool? This study mainly investigates the above questions.This study examines the following issues, using 2006 annual reports and 2007 data: firstly, whether future earnings prediction, which the retroactive recognition of deferred tax assets is based on, is relevant to the historical earnings, and uses the 2007 actual earnings data to detect whether the future earnings prediction is accurate; then explores whether the newly adopted recognition policy of the deferred tax assets which allows more sufficient subjective judgment has given the management opportunities of earnings management; at last, assess the incremental usefulness of deferred tax assets in detecting earnings management to avoid a loss beyond total accruals and abnormal accruals. Evidences suggest that future earnings prediction, which the retroactive recognition of deferred tax assets is based on, is highly relevant to the historical earnings and 2007 actual earnings, except that the earnings prediction of the 2006 loss companies is not so accurate. The result doesn't reveal that companies overstate 2007 income using deferred tax asset for their bonus and for their debt contract motivations. However, the listed companies being special treated during 2006 do extensively recognize deferred tax assets to overstate assets. Evidences suggest deferred tax assets provide incremental value over total accrual items when detecting earnings management of all profit companies, however, this conclusion cannot be drawn when turns to small profit companies. The contribution of this study might be the follows: under the institutional background of income tax accounting standards transformation, this study empirically investigates the relavance of recognition of deferred tax assets with earnings management, which increases the evidences to the study in this field and gives feedbacks for standards setter and regulators to evaluate the implementation effectiveness.