Tax allocation, Taxation, Opinion No. 11, Investment credit

Depreciation, Income tax, Tax allocation

An examination of the literature and published financial statements discloses that the distinctions among operating, financing, and investing activities, as well as the distinctions between central operating activities and peripheral or incidental operating activities, are ambiguous for income statement and funds statement purposes, notwithstanding recent FASB efforts at clarification. Manifestly, the same distinctions among these activities should be applied consistently in both the income statement and the funds statement. This paper examines some of the problems in achieving such consistency, largely within the context of the recently proposed financial reporting framework of the FASB. Additionally, this paper examines the funds statement presentation of the income tax effects of operating, financing, and investing activities. It is demonstrated that income taxes should be allocated within the funds statement among these activities, much as income taxes are already allocated within the income statement between income from continuing operations and extraordinary items.

Reviews the book "Intermediate Accounting: Concepts, Methods, and Uses," by Sidney Davidson, Clyde P. Stickney, and Roman L. Weil.

Reviews the book "Accounting Theory," 3rd ed., by Eldon S. Hendriksen.

Provides information on the Opinion No. 8, 'Accounting for the Cost of Pension Plans' study issued by the Accounting Principles Board. Features of the study; Information on normal cost, service cost and prior service cost in pension plan; Difference between defined minimum and defined maximum in pensions.

The article reports that discounting deferred tax liabilities constitutes a departure from the incurred cost standard underlying the accounting for other liabilities. Nevertheless, this departure has merit, for the operational advantages of deferring taxes are disclosed separately in the income statement. Financial management theory suggests that the appropriate discount rate is the comparable after-tax cost of alternative debt or equity, but the determination of the relevant alternative is not obvious. This ambiguity is not insurmountable, however, for accrual accounting in general is inherently tentative. The important point is that deferred tax liabilities should be reported on a discounted basis. The final determination of the appropriate rate of discount can await further empirical research. The discounting of a deferred tax liability for financial accounting purposes may be illustrated by considering a highly simplified example. Thus, on the first day of 19x1, a firm has $1,000,000 of assets on which it earns 14 percent annually before interest and taxes.

Reviews the book "Electric Money: Evolution of an Electronic Funds-Transfer System," by Dennis W. Richardson.

The article comments on two accounting terms: present value depreciation and income tax allocation. A depreciable asset encompasses a series of future net cash flows. The cost or value of the asset is equal to these net cash flows, discounted to the present by some appropriate interest rate. For any particular period, depreciation may be viewed as the decrease in the present value of these net cash flows as between the beginning and end of the period, and the net income from the asset may be viewed as the net cash flow for the period less depreciation. Accordingly, the net income from the asset for any particular accounting period is also equal to the product of the value of the asset at the beginning of the period and the discount rate employed in these calculations. Additionally, the timing of depreciation for tax purposes affects the value of the asset and hence the amount of depreciation expense to be recognized in the accounts. Depreciation timing differences are indicative of a decrease in net assets; of this proponents of both the net-of-tax method and the liability method concur. But whether this net asset decrease represents a decrease in an asset or an increase in a liability remains subject to controversy.