Perceived versus Actual Cash Flow Implications of Deferred Taxes - An Analysis of Value Relevance and Reversal under IFRS

This paper provides the first value relevance analysis of deferred tax disclosures under IFRS/IAS. The comprehensive analysis, taking into account the different deferred tax components, shows that investors generally do not consider deferred taxes to convey relevant information for assessing firm value, with the exception being large net deferred tax assets. In order to examine whether the general value irrelevance of deferred tax information may be due to lacking cash flow implications, the value relevance analysis is complemented by an analysis of deferred tax balance reversal, including a quantification of deferred tax cash flow as it is implied by balance reversal. This supplemental analysis reveals that about 70 percent of the deferred tax balance persists over time, with increasing accounts dominating decreasing accounts over a four-year horizon and deferred tax assets being clearly more reversing than deferred tax liabilities. Further, quantifications reveal that the majority of balance reversals have rather negligible cash flow implications