Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
NORMAN WONG*
* The author is from the University of Aukland. This study is based on his PhD thesis at
the University of Auckland. He would especially like to thank the anonymous referee
and the following people for their helpful comments: Jilnaught Wong and David
Emanuel (supervisors), Henk Berkman, Jerry Bowman, Mike Bradbury, Philip
Brown, Dan Dhaliwal, Jayne Godfrey, Alister Hunt, Michael Keenan, Paul Koch,
Richard Morris, Steve Rock, Paul Rouse, Greg Schwann, Phil Shane, Baljit Sidhu,
Barry Spicer, Stephen Taylor, Robert Wilton, Ian Zimmer, and seminar participants
at the University of Auckland, the AAANZ Doctoral Colloquium in Tasmania, and the
Annual Summer Research School in Financial Reporting and Corporate Governance,
jointly sponsored by the University of Sydney and the University of Technology,
Sydney. He would also like to thank Margaret Tibbles for her assistance in locating a
number of annual reports that were needed in the study. (Paper received September
2003, revised and accepted June 2004)
Address for correspondence: Norman Wong, Department of Accounting and Finance,
Faculty of Business and Economics, The University of Auckland, Private Bag 92019,
Auckland, New Zealand.
e-mail: n.wong@auckland.ac.nz
# Blackwell Publishing Ltd. 2005, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA. 1171
1172 WONG
1. INTRODUCTION
1 This occurs because partial tax allocation only recognizes timing differences, the items
that give rise to the deferred tax liability, that are expected to reverse in the foreseeable
future in the calculation of income tax (i.e., deferred tax liabilities that are unlikely to be
paid are not recognized). In comprehensive tax allocation, all timing differences are
recognized no matter if they reverse or not.
2 The terms comprehensive and partial are not actually used in SSAP-12, but are
implied. The choice to allow comprehensive or partial arose primarily as a result of
the empirical evidence suggesting the non-reversal of deferred tax liabilities under the
comprehensive basis.
3 Statistics on the number of companies that use comprehensive versus partial to
account for income tax in New Zealand for the time period examined in this study are
not well documented. However, surveys by Alley (1990 and 1994) of the top 100 listed
companies in New Zealand for the years 1988 to 1992 show the following: in 1988, 50
used comprehensive, while 36 used partial; in 1989, 37 used comprehensive, while 42
used partial; in 1990, 36 used comprehensive, while 18 used partial; in 1991, 26 used
comprehensive, while 21 used partial; and in 1992, 30 used comprehensive, while 21
used partial (the number of companies surveyed each year varies because the necessary
data for each company were not always disclosed or available). Alley also reports that
one of the major items in New Zealand that creates a timing difference is from the
application of different depreciation rates for calculating income for taxation and
accounting purposes. Further, companies in New Zealand typically use the straight
line method, as opposed to accelerated methods, to depreciate fixed assets for account-
ing purposes (see Ritchie, 1990 and 1994).
3. HYPOTHESES
6 Firms may also have an incentive not to change to partial, but remain on compre-
hensive, because of political costs that may be associated with the reporting of low tax
rates in the income statement when using partial (Wong, 1986; and Gupta, 1995).
However, I do not investigate this incentive because Wong (1986) and Gupta (1995)
find that New Zealand and US firms, respectively, are unlikely to mitigate these political
costs through the choice of interperiod tax allocation method.
7 Two further opportunistic situations can also arise. First, a firm rewarding its man-
agers on the basis of an earnings-based bonus scheme has an incentive to change to
partial to increase the bonus that managers receive. And second, a firm that is large in
size has an incentive to change to partial to reduce the political costs of reporting a large
deferred tax liability figure in the balance sheet. These two opportunistic situations,
respectively, are not tested in this study because (1) bonus scheme information is not
disclosed publicly in New Zealand (Wong, 1986), and (2) there is difficulty in attributing
the size effect that may be observed solely to the political cost phenomenon (Ball and
Foster, 1982).
H2: Firms that change to partial are more likely to have debt
to total tangible assets ratios that are greater than those
of firms that remain using comprehensive.
H3: Firms that change to partial are more likely to have
earnings performance that is lower than those of firms
that remain using comprehensive.
4. RESEARCH METHODOLOGY
8 Initially, industry was also chosen as a matching variable. However, matching the
change sample on the basis of these three criteria (i.e., size, time period, and industry)
was difficult because of the inability to find a control firm with an approximately equal
size in the same industry as the change firm in the year of the change. I decided that the
more important variable to match on was size and hence industry was excluded as a
matching criterion. See Panel B of Table 2 and the discussion later, which show that in
any event there does not appear be an industry effect in the data.
9 Additional investigation shows little indication that the loss of observations in event
year 2 is due to financial distress (eight of the missing observations are due to the firm
being taken over, while one is due to the firm being in financial distress and delisted).
Despite this, caution should still be used in interpreting the results of the study as the
sample size is small and there may exist a mortality threat to internal validity.
10 In New Zealand, firms only show the net effect of their deferred tax liabilities and
future tax benefits. They are less likely to disclose these items separately in the balance
sheet.
11 Intangible assets (e.g., goodwill) are also included in this item, and hence, are
excluded in these variable calculations, because in general the amortization of intangible
assets is never an allowable deduction in New Zealand (i.e., amortization of intangible
assets are treated as permanent differences).
12 In general, when depreciable assets are revalued, depreciation is calculated on the
revalued amount for accounting purposes but only on the historical cost amount for tax
purposes. Therefore, a permanent difference, rather than a timing difference, is created
because the part of depreciation that relates to the revaluation increment is never an
allowable deduction for tax purposes.
13 An alternative, and perhaps better, measure to proxy for the closeness of debt
covenant breach may also be to use the ratio of the firms leverage to the industry
average leverage (I would like to thank the referee for making this suggestion).
However, I am unable to calculate this measure in this study because data for industry
average leverage are not available.
14 In New Zealand, there is no regulatory requirement for firms to disclose their
accounting-based debt covenants in their financial reports.
15 I also test the coefficient estimates using the uncorrected covariance matrix. The
results of these tests do not alter the regression findings reported in this study. The
Pearson and Spearman correlations between the variables in each model are also
calculated. In general, these correlations exhibit low association. Hence, multicollinear-
ity does not appear to be a major concern.
5. RESULTS
16 In the two chi-square tests that follow, caution should be used in interpreting the
results because of the small number of observations in some cells which may make the
tests suspect.
Univariate Tests for Total Assets for Experimental Firms Changing to the Partial Basis and Control Firms that
Remained on Comprehensive (levels in thousand of dollars)
Event Timea 3 2 1 0 1 2
Change Sample
Mean 63,317 76,041 92,314 118,263 117,853 116,533
Median 32,793 41,551 51,170 59,598 73,361 72,145
Min. 2,679 3,530 3,815 4,430 5,665 6,432
Max. 380,728 386,854 483,029 587,994 514,910 431,439
SD 83,329 97,660 112,277 137,504 132,469 122,093
Control Sample
Mean 73,947 81,893 95,608 111,232 139,565 136,951
Median 47,020 51,171 52,972 55,102 64,035 66,318
Min. 1,920 2,839 2,429 2,015 2,472 4,530
WONG
#
(two tailed probabilities):
Paired t-test 0.254 0.517 0.689 0.112 0.240 0.357
Wilcoxon 0.118 0.183 0.386 0.280 0.564 0.511
N pairs 27 31 33 33 27 24
Note:
a
Event time is the year relative to the year of change to the partial tax allocation basis for firms in the experimental sample. That is: event time 3
is the year three years prior to the change; event time 2 is the year two years prior to the change; event time 1 is the year prior to the change;
event time 0 is the year of the change; event time 1 is the year subsequent to the change; and event time 2 is the year two years subsequent to
the change.
Table 2
Distribution of Experimental and Control Sample Firms on Event
Dates (i.e., year experimental firms change to partial basis) and
Industry Membership
Panel A
Year Change Sample Control Sample
1981 2 2
1982 3 3
1983 4 4
1984 4 4
1985 1 1
1986 5 5
1987 1 1
1988 3 3
1989 2 2
1990 2 2
1991 2 2
1992 1 1
1993 2 2
1994 1 1
Total 33 33
Panel B
Industry Classification Change Sample Control Sample
Agriculture 5 1
Automotive 1 2
Chemicals 1 3
Construction 2 1
Electrical 1 1
Energy and fuel 1 0
Engineering 2 2
Food 2 2
Forestry and forest products 1 2
Liquor and tobacco 0 2
Meat and by-products 1 1
Media and communications 2 3
Medical supplies 0 1
Mining 1 0
Miscellaneous 3 4
Printing and publishing 0 1
Property 4 1
Retail merchants 2 4
Textiles and apparel 2 2
Transport and tourism 2 0
Total 33 33
Table 3
Descriptive Statistics and Univariate Tests of Hypothesized Variablesb
Using the Experimental Group-control Group, Before After (Pretest-
posttest) Research Design
Event Timea 3 2 1 0 1 2
Panel A: CI (+)
Change Sample:
Mean 0.308 0.284 0.252 0.263 0.289 0.299
Median 0.259 0.228 0.218 0.238 0.273 0.282
SD 0.205 0.199 0.181 0.173 0.197 0.190
Control Sample:
Mean 0.217 0.226 0.246 0.253 0.247 0.250
Median 0.226 0.223 0.228 0.213 0.237 0.238
SD 0.099 0.124 0.142 0.149 0.143 0.147
Test of Paired Differences (one tailed probabilities):
Paired t-test 0.026 0.118 0.449 0.415 0.218 0.203
Wilcoxon 0.029 0.092 0.378 0.344 0.200 0.200
N pairs 27 31 33 33 27 24
Table 3 (Continued)
Event Timea 3 2 1 0 1 2
17 A similar result is found when testing hypothesis H2 using the DCOV variable. In
particular, the percentage of firms with accounting-based debt covenants (i.e., DCOV) is
generally higher for the change sample in each event year (the mean DCOV in event
years 3, 2, 1, 0, 1 and 2, respectively, for the change sample is 0.481, 0.355,
0.364, 0.394, 0.407 and 0.333; while for the control sample, it is 0.333, 0.355, 0.303,
0.242, 0.296 and 0.292), but only in event year 0 is the mean difference significant (the
one tailed probability value using the paired t-test and Wilcoxon test, respectively, is
0.067 and 0.066).
18 Although not reported, I also test hypothesis H3 using Return on Equity (ROE),
which is defined as the net profit before tax divided by shareholders funds for each firm
i in event time t. The ROE results do not alter the ROA findings reported in this study
and are not discussed further.
Logit Analysis of the Relation Between the Decision to Change to the Partial Basis and the Hypothesized Variablesb
Modela (coefficient, t-statistic in parentheses) 1 2 3
#
(0.165) (0.469) (0.700)
D2 0.077 0.027
(0.204) (0.069)
D1 0.072 0.023 0.016
(0.193) (0.061) (0.042)
D0 0.067 0.018 0.038
(0.182) (0.047) (0.100)
D1 0.016 0.061 0.053
(0.041) (0.150) (0.131)
level) and 3 (at the five percent level). ROA, LOGTA and the
time dummies are insignificant in all the models.19
Subject to concerns over the use of the pooled model, as
discussed in the research design section, overall the regression
results suggest that the variables representing efficiency (CI,
PROGDA and CGDA) and debt-related opportunistic variables
(LEV and DCOV) are significant factors that influence the
accounting decision to change income tax accounting method
from comprehensive to partial. This finding is inconsistent with
Gupta (1995), who finds little evidence to suggest that efficiency
is related to the interperiod tax allocation choice he concludes
that opportunism is more likely. However, the regression
results are generally consistent with the findings in Skinner
(1993), who concludes that opportunism or efficiency cannot
be separated from each other as explanations for accounting
choice, and with Holthausens (1990, p. 209) comment that
opportunistic and efficient contracting incentives may be partial
explanations of firms accounting choice decisions.
6. CONCLUSION
19 I also investigate whether firms that change to partial are more likely to have
increases in leverage and decreases in earnings performance, respectively, that are greater
than those of firms that remain on comprehensive from event year 1 to event year 0.
This analysis examines if the change to partial is motivated by changes in the financial
performance and/or financial position of the firm. To do the analysis, I estimate for each
model a cross-sectional regression for event year 0 only by replacing the LEV and ROA
variables with the change in leverage (CLEV) and the change in return on assets
(CROA), respectively, from event year 1 to event year 0. I find that the results of
this analysis do not alter the tenor of the findings in the pooled regressions. Specifically,
the results are as follows: (1) for Model 1, where CI measures the investment in
depreciable assets, only the estimates of DCOV (at the one percent level) and CLEV
(at the five percent level) have a significant and positive effect; (2) for Model 2, where
PROGDA measures the investment in depreciable assets, only the estimates of DCOV (at
the five percent level), CLEV (at the five percent level) and PROGDA (at the one percent
level) have a positive and significant effect; and (3) for Model 3, where CGDA measures
the investment in depreciable assets, only the estimates of CLEV and CGDA (both at the
ten percent level) have a significant and positive effect.
20 Six case studies (three firms each from the change and control samples, respectively)
were also conducted to complement the statistical analyses and to provide a more
detailed contextual analysis of the circumstances of the firms. Using financial and non-
financial evidence that was collected, the results of the case study analyses suggest the
following: (1) all case companies are profitable and there does not appear to be any sign
of financial distress; (2) all case companies are not close to breaching their leverage ratio
defined debt covenant limits, which state that debt should not exceed an amount that is
equal to 60 (or sometimes 65 percent in some cases) of total tangible assets; and (3) case
companies from the change sample appear to be more involved in increasing their
investments in depreciable assets than cases from the control sample and they state that
the change to partial is because their timing differences are growing and are unlikely to
reverse in the foreseeable future. Overall, these results indicate that the accounting and
debt contracting decisions of the case study firms that relate to income tax are influ-
enced more by efficient contracting, rather than opportunistic, factors.
REFERENCES
Alchian, A.A. (1950), Uncertainty, Evolution and Economic Theory, Journal
of Political Economy, Vol. 58, No. 3, pp. 21121.
Alley, C.R. (1990), SSAP-12, Accounting for Inter-period Allocation of
Income Tax, in J.B. Ryan (ed.), New Zealand Company Financial
Reporting: 1990 (Premier Print Services, Auckland), pp. 18498.
(1994), SSAP-12, Accounting for Inter-period Allocation of Income
Tax, in J.B. Ryan (ed.), New Zealand Company Financial Reporting: 1994
(Premier Print Services, Auckland), pp. 191209.
Ball, R. (1989), The Firm as a Specialist Contracting Intermediary:
Application to Accounting and Auditing, University of Rochester
Working Paper.
and G. Foster (1982), Corporate Financial Reporting: A
Methodological Review of Empirical Research, Journal of Accounting
Research, Vol. 20 (Supplement), No. 20, pp. 161234.
Baltagi, B.H. (1995), Econometric Analysis of Panel Data (John Wiley and
Sons).
Beaver W.H. and R.E. Dukes (1972), Interperiod Tax Allocation, Earnings
Expectations, and the Behavior of Security Prices, The Accounting Review,
Vol. 47, No. 2, pp. 32032.
Beechy, T.H. (1983), Accounting for Corporate Income Taxes: Conceptual
Considerations and Empirical Analysis (The Canadian Institute of
Chartered Accountants, Canada).
Chaney, P. and D. Jeter (1994), The Effect of Deferred Taxes on Security
Prices, Journal of Accounting, Auditing and Finance, Vol. 9, No. 1, pp. 91116.
Christie, A.A. (1990), Aggregation of Test Statistics: An Evaluation of the
Evidence on Contracting and Size Hypotheses, Journal of Accounting and
Economics, Vol. 12, No. 13, pp. 1536.
(1992), An Analysis of the Properties of Fair (Market) Value Accounting,
in K. Lehn and R. Kamphuis (eds.), Modernizing US Securities Regulation:
Economic and Legal Perspectives (Pittsburgh: The Center for Research on
Contracts and the Structure of the Enterprise, Joseph M. Katz Graduate
School of Business, University of Pittsburgh), pp. 77100.
Citron, D.B. (2001), The Valuation of Deferred Taxation: Evidence from the
UK Partial Provision Approach, Journal of Business Finance and Accounting,
Vol. 28, Nos. (7) & (8), pp. 82152.
Daley M. (1995), The Impact of Deferred Tax Allocation on Earnings as a
Measure of Firm Performance, University of Rochester PhD Dissertation.
Davidson, S. (1958), Accelerated Depreciation and the Allocation of Income
Taxes, The Accounting Review, Vol. 33, No. 2, pp. 17380.
Fama, E.F. and M.C. Jensen (1983a), Separation of Ownership and Control,
Journal of Law and Economics, Vol. 26, No. 2, pp. 30125.
(1983b), Agency Problems and Residual Claims, Journal of Law
and Economics, Vol. 26, No. 2, pp. 32749.
Fields, T., T. Lys and L. Vincent (2001), Empirical Research on Accounting
Choice, Journal of Accounting and Economics, Vol 31, No. 13,
pp. 255307.
Gordon, E.A. and P.R. Joos (2004), Unrecognized Deferred Taxes: Evidence
from the UK, The Accounting Review, Vol. 79, No. 1, pp. 97124.
Gujarati, D.N. (2003), Basic Econometrics (McGraw-Hill).
Gupta, S. (1995), Determinants of the Choice Between Partial and Comprehensive
Income Tax Allocation: The Case of the Domestic International Sales
Corporation, The Accounting Review, Vol 70, No. 3, pp. 489511.
Holthausen, R.W. (1990), Accounting Method Choice, Opportunistic
Behavior, Efficient Contracting, and Information Perspectives, Journal
of Accounting and Economics, Vol. 12, No. 13, pp. 20718.
Institute of Chartered Accountants (1996), Invitation to Comment: Accounting for
Income Tax by Taxpayers (Institute of Chartered Accountants).
Jensen, M.C. (1983), Organization Theory and Methodology, The Accounting
Review, Vol. 58, No. 2, pp. 31939.
Judge, G.C., R.C. Hill, W.E. Griffiths, H. Lutkepohl and T.C. Lee (1988),
Introduction to the Theory and Practice of Econometrics (John Wiley and Sons).
Mian, S.L. and C.W. Smith (1990), Incentives for Unconsolidated Financial
Reporting, Journal of Accounting and Economics, Vol. 12, No. 13, pp. 14171.
Press, E.G. and J.B. Weintrop (1990), Accounting-based Constraints in Public
and Private Debt Agreements: Their Association with Leverage and
Impact on Accounting Choice, Journal of Accounting and Economics,
Vol. 12, No 13, pp. 6595.
Price Waterhouse and Co. (1967), Is Generally Accepted Accounting for Income
Taxes Possibly Misleading Investors? (Price Waterhouse and Co., New York).
Rayburn J. (1986), The Association of Operating Cash Flow and Accruals with
Security Returns, Journal of Accounting Research, Vol. 24 (Supplement),
pp. 11233.
Ritchie, K.A. (1990), Accounting for Depreciation, in J.B. Ryan (ed.), New
Zealand Company Financial Reporting: 1990 (Premier Print Services,
Auckland), pp. 4563.
(1994), Accounting for Depreciation, in J.B. Ryan (ed.), New Zealand
Company Financial Reporting: 1994 (Premier Print Services, Auckland),
pp. 5060.
Ryan, J.B., C.T. Heazlewood, J. Wong and M. Chye (1984), New Zealand
Company Financial Reporting: 1984 (University of Wollongong Printery,
Wollongong).
Skinner, D.J. (1993), The Investment Opportunity Set and Accounting
Procedure Choice, Preliminary Evidence, Journal of Accounting and
Economics, Vol. 16, No. 4, pp. 40745.
Smith, C.W. (1993), A Perspective on Accounting-based Debt Covenant
Violations, The Accounting Review, Vol. 68, No. 2, pp. 289303.
Swieringa, R.J. (1998), Accounting Research and Policy Making, Accounting
and Finance, Vol. 38, No. 1, pp. 2949.
Watts, R.L. (1977), Corporate Financial Statements, a Product of the Market
and Political Processes, Australian Journal of Management, Vol. 2, No. 1,
pp. 5375.
and J.L. Zimmerman (1986), Positive Accounting Theory (Prentice-Hall).
(1990), Positive Accounting Theory: A Ten Year Perspective,
The Accounting Review, Vol. 65, No. 1, pp. 13156.
White, H. (1982), Maximum Likelihood Estimation of Misspecified Models,
Econometrica, Vol. 50, No. 1, pp. 125.
Wise, T.D. (1980), Deferred Tax: A Behavioural Analysis, in D.M. Emanuel
and I.C. Stewart (eds.), Essays in Honour of Trevor R. Johnston (University
of Auckland and New Zealand Society of Accountants, Auckland),
pp. 26198.
(1986), A Note on Additional Evidence on the Behaviour of Deferred
Tax Credits, Journal of Business Finance & Accounting, Vol. 13, No. 3,
pp. 43344.
Wong, J. (1986), Economic Determinants of Accounting Choices, University
of Auckland PhD Thesis.
(1992), Financial Reporting Choices: Are They Opportunistic?, Pacific
Accounting Review, Vol. 4, No. 1, pp. 11536.
and N. Wong (2001), The Investment Opportunity Set and Acquired
Goodwill, Contemporary Accounting Research, Vol. 18, No. 1, pp. 17396.
Zimmer, I. (1989), Reactions by Australian Firms to Accounting Regulations,
Pacific Accounting Review, Vol. 2, No. 1, pp. 118.