A Study On The Correlation Between Income Tax Accounting And The Value Of Financial Statement

In pace with China’s economic system reform and the timely progress of the internationalization of Chinese accounting, making China’s accounting standards in line with international accounting practices and applicable under the condition of China’s economic environment has become a necessary task. Regarding the accounting practices for income taxes, the current “balance sheet debt approach” is in conformity with the development of market economy in our country, at the same time to adapt to the trend of the development of economic globalization. Along with the tax system and accounting system reforms in our country, income tax accounting has also become one of the major changes in enterprise accounting work, and promoted the development of accounting standards and practices in the past decades.Our country implements the dual disclosure system for financial statement presentation, which requires public companies to provide the consolidated financial statements and the parent company financial statements simultaneously. However, many foreign countries adopt the practice of single disclosure system, namely only the consolidated financial statements are required. Although the role and function of the consolidated financial statements have been widely recognized, the perception of the role and function of the parent company statements remain controversial. Thus, this study intends to investigate whether the parent company financial statements can provide incremental information from the perspective of accounting for income taxes in light of the recent adoption of new accounting standards for income taxes in our country.In this study, the research is based on the assets and liabilities approach for accounting for income tax items(i.e., the income tax expenses and deferred income taxes) to pursuit the research objectives, trying to explore the value relevance from the varied presentation forms of financial reporting(e.g. the consolidated financial statements and parent company financial statements) in terms of the disclosure of income tax accounting information. In addition, this study further explores the potential impact of the difference in the income tax items reported by the consolidated financial statements and parent company financial statements respectively on stock pricing, thus to test whether incremental information content is available to justify the merits or disadvantages of single disclosure system or dual disclosure system under the Chinese market conditions.The study consists of six sections as listed follows:Section I: Introduction. To introduce the research background and significance, research plan and research methods.Section II: Literature Review. Previous studies on issues regarding accounting for income taxes and value relevance of varied forms of financial statement presentation conducted by domestic and foreign scholars are reviewed or summarized.Section III: Theoretical Framework. First of all, this study reviews the evolution of accounting standards and practices for income taxes in our country, illustrates the rationale underline the changes from the “revenue and expense approach” to “assets and liabilities approach” over the past decades in Chinese accounting and recent convergence of Chinese accounting standards for income taxes in line with the international accounting standards, and illustrates the potential impact of the changes in accounting standards and practices for income taxes on the information content and usefulness of financial statements of the enterprise. Again according to the extant literature, analysis shows that the balance sheet liability method of income tax accounting has greater value relevance of accounting information, comparing to other accounting methods used previously, and it can provide users of financial statements of relevant information for investment decision-making. Secondly, the theoretical analysis of the different roles and functions of the varied disclosure presentation of financial statements of the enterprise is performed. By comparing the disclosure systems for financial statements presentation in our country and abroad, this study discusses the advantages and disadvantages if the “single disclosure system” in foreign countries and the “dual disclosure system” in our country, thus, to provide evidence to justify the necessity and usefulness of parent statements financial statements for investors and creditors in the Chinese market.Section IV: Research Design. Analytical models are established, following the relevant prior studies. Data collection based on the sample firms listed in Shanghai and Shenzhen Stock Exchanges are specified in order to examine the following questions:(1) whether income tax accounting information disclosed by either consolidated and parent financial statements is correlated to the value of the stock price, and compare whether the consolidated financial statements can have a greater value relevance than the parent company financial statements;(2) whether accounting for income taxes under the balance sheet debt method implemented after the adoption of new business accounting standards in our country can provide more relevant information in contrast to the previous practices;(3) whether the difference in the income tax information disclosed by the consolidated financial statements and parent company financial statements has incremental information content to justify the necessity and usefulness of proving parent company financial statements, along with the consolidated financial statements, to better fulfill the information needs of financial statement users in our country. This section shows the descriptive statistics of our sample and test variables as well as the correlation and regression analysis results. Thus our three hypotheses are tested with the empirical evidence. In addition, a few sensitivity tests and their results are reported to enhance the reliability of our empirical results.Section V: Conclusion and Proposal. This section briefly summarizes our study purposes, significance and the conclusions of our study results as well as the potential implications for the development of accounting standards and practices in our country. In addition, the study limitations and potential future study issues are pinpointed.