Evidence on book-tax differences and disclosure quality based on the notes to the financial statements

The German Accounting Law Modernization Act (BilMoG) represents a change in paradigm with regard to the traditionally close relationship between financial and tax accounting in Germany. At the same time, requirements on the disclosure of deferred taxes were revised considerably. We make use of these new disclosure provi-sions to disaggregate firms’ deferred tax position and to analyze the components of temporary book-tax differences that add to the reporting gap in Germany. To this end, we apply a unique dataset of hand-collected information from individual financial statements for the fiscal year 2010. We find considerable differences between financial and tax accounting and observe that temporary book-tax differences are mainly associ-ated with mandatory differences in accounting for provisions. The scope and quality of tax-related disclosures vary substantially and the overall disclosure quality is low. In order to identify the determinants of the heterogeneity of disclosure quality, we con-struct an index for voluntary and mandatory disclosure of deferred tax information and conduct multivariate analyses to explain firms’ disclosure decisions. We show that the recognition of deferred tax assets and liabilities on the face of the balance-sheet is sig-nificantly and positively related with disclosure quality in the notes to the financial statements. Further, our results suggest that larger firms are more likely to have high-quality tax disclosures and that high implementation costs could also explain the ob-served shortfalls in disclosure quality. Moreover, we find that different reporting incen-tives might apply if reporting on losses is assessed in isolation. We use these insights to derive implications for the discussion about whether and how to reform disclosure re-quirements under German GAAP.