1、中文 3060 字， 1600 单词， 9000 英文字符 原文 Taxable income and analysis Material Source:CA MagazineAuthor: Suzanne Landry and NadiChlala It can be a useful element to assess the quality of earnings reported by listed entities The financial scandals of the past few years have underscored how important it is for
2、 investors to consider the quality of earnings reported by listed entities. Despite the existence of many benchmarks, the financial market seemed unable to foresee these events. Recently, an attempt was made to assess earnings quality by connecting the dots between pre-tax income accounting income a
3、nd taxable income, the argument being it would be unusual for a company to report high net earnings while showing little or no tax liability. The Enron case was cited as an example because between 1996 and 1999 the company had no taxable income, even though it reported accounting income of US$2.3 bi
4、llion in the same period. Similarly, the WorldCom affair was evoked, where Andersen was blamed for failing to question the gap between accounting income and taxable income. There are a number of useful factors to consider if taxable income is to be used as a benchmark to assess the quality of report
5、ed earnings, and the appropriateness of such a benchmark and its limitations need to be examined. Earnings quality assessment factors Investors use different benchmarks to analyze an enterprises earnings. The purpose of these benchmarks is to verify two specific characteristics of reported earnings.
6、 The first concerns the relevance of earnings to decision-making. The more net earnings reflect the enterprises economic performance, the more they are perceived as being of good quality and the more financial statement users will be able to rely on them for decision-making. The second characteristi
7、c is the absence of management bias. Net earnings are compared to other figures that require fewer estimates and are thus less likely to be biased, such as cash flow from operations. The more net earnings are consistent with cash flow from operations, the more they are deemed to be of good quality.
8、In addition, since management tends to want to increase net earnings, the fact it adopted conservative accounting practices is an indicator of its lack of bias. Taxable income as benchmark to assess earnings quality Taxable income could be a valid benchmark, especially as concerns the second charact
9、eristic. Managements judgment and fair value measurement have recently played a major role in determining net earnings, thus increasing the risk of biased information. There are three main advantages to using taxable income as a benchmark. First, taxable income is less subject to falsification than
10、cash flow from operations, which is directly affected by transfers of receivables, accelerated accounts receivable collection, and delays in the settlement of payables. In addition, the taxable income figure reflects managements optimism because it is lower than accounting income. Management hesitat
11、es to artificially inflate taxable income, unlike earnings and cash flow. Finally, the measurement of taxable income is not as flexible as for accounting income. As a result, taxable income is less likely to be manipulated by management and an unusual gap between accounting and taxable income may in
12、dicate financial statement manipulation or aggressive tax behaviour. In the US increasing divergence between accounting income and taxable income in the last few years raises the following question: are enterprises manipulating the financial statements or are they using aggressive financial planning
13、 methods, or both? Studies suggest taxable income provides information on earnings quality because US tax law limits the deduct-ibility of certain expenditures such as warranty provisions and restructuring costs, which are generally the vehicle for earnings manipulation. First Baruch Lev and DoronNi
14、ssim suggest using taxable income as a reference to ensure the reality and consistency of accounting income. According to them and Michelle Hanlon, financial statement or income tax return manipulation can be detected by analyzing the relationship between taxable income and accounting income. The si
15、gnificant gaps between accounting and taxable income also lead to questions from tax authorities Lillian Mills, 1998； US Treasury Department, 1999 and the general public Gil Manzon, 1992, which can also increase capital cost. For example, a material difference between accounting and taxable income m
16、ay indicate to investors that the accounting income is not enduring or persistent over the long term and, consequently, of inferior quality. Management may also want to reduce the gap between accounting income and taxable income. US researchers have noted that management does this to justify aggress
17、ive tax behaviour by adopting an accounting policy that will depress accounting income Bryan Cloyd et al., 1996 or to minimize the risk that aggressive accounting practices will be discovered Merle Erickson et al., 2004. Various financial analysis publications have also addressed this issue over the
18、 years. For instance, Krishna Papelu, Paul Healy and Victor Bernard 2000 contend that the widening gap between accounting income and taxable income is an indication of aggressive accounting policies. Similarly, Lawrence Revsine, Daniel Collins and Bruce Johnson 2005 submit that it is perhaps a sympt
19、om of the deterioration of earnings quality and suggest an earnings conservatism ratio EC calculated as accounting income divided by taxable income. In their view, accounting income and taxable income that are close, i.e. where the EC ratio is close to one, result in higher earnings quality. They al
20、so highlight the importance of comparing EC ratios between different periods and corporations to identify unusual relationships that require further examination. Limitations of using taxable income as a benchmark to assess earnings quality Three factors limit the use of the difference between accoun
21、ting and taxable income as a benchmark for earnings quality. The first factor concerns the specific objectives sought in establishing these two figures. The purpose of accounting income is to provide useful information for economic decision-making while taxable income is meant, among other things, t
22、o obtain funds to pay government expenses. In light of these different objectives, taxable income may not be a valid measurement of earnings quality. The second factor has to do with the basis of the calculation. Accounting rules are intended to reflect the economic substance of transactions and the
23、 relations between various entities. For instance, consolidated financial statements are required under generally accepted accounting principles GAAP, which is not the case for tax purposes. Also, the impairment of long-lived assets and the setting up of various provisions, which must be accounted f
24、or in accordance with GAAP, provide information that is useful for economic decision-making. Such expenses are not tax deductible. Consequently, it can be argued that taxable income is incomplete and as such does not constitute a valid benchmark to assess earnings quality. The third factor concerns
25、managements motivations. It is in managements interest to maximize accounting income and to minimize taxable income. Accordingly, significant differences between accounting and taxable income may be due to effective tax planning rather than the quality of lower earnings. It should be noted, however,
26、 that the divergence between accounting and taxable income is mitigated by tax laws in Canada. The tax authorities have tended to use accounting information as a basis for calculating taxable income and taxes pay- able. For federal tax purposes, corporations reconcile their accounting and tax income
27、 using Appendix 1 of the T-2 income tax return. The financial statements prepared for investors are the starting point of this reconciliation. In this way, they reduce the costs of auditing income tax returns and limit opportunities for aggressive tax planning. Without this tie-in, it would be easie
28、r for management to both maximize its accounting income to reduce its cost of debt capital and minimize taxable income to lower its tax liability. Finally, a major constraint in using taxable income as a benchmark to assess earnings quality is its confidential nature. Taxable income need not be disc
29、losed under GAAP. In fact, there is no recommendation in CICA Handbook Section 3465 respecting the presentation of taxable income or its reconciliation with accounting income. The Accounting Standards Board AcSB seems to feel this information is only useful to tax authorities. Consequently, investor
30、s can only estimate taxable income based on the income tax expense for the period and the tax rate in effect disclosed in the notes to the financial statements. This estimate may not be suitable in situations where the corporation operates in several jurisdictions, prepares consolidated financial st
31、atements or has set up provisions for a potential challenge of its income tax returns by tax authorities. The difficulty of estimating taxable income has been noted by financial journalists. For example, an article in Business Week April 26, 2004 indicated that it is very difficult for sophisticated
32、 investors to determine the amount of income taxes a particular corporation must pay and the amount that can be deferred indefinitely. Another article from the Wall Street Journal October 8, 2002 suggested that information included in the tax returns of listed entities be made public. Conclusion The
33、 gap between accounting and taxable income is a reflection of the choices made at two levels ?accounting policies and estimates, and tax planning. Tax authorities can examine the reconciliation between accounting and taxable income to detect any irregularities. As for investors and financial analyst
34、s, this examination is impossible since no reconciliation is published in the financial statements. Further analysis of earnings quality is possible with the reconciliation of accounting and taxable income, combined with other methods of analysis such as the relationship between accounting income an
35、d cash flow from operations. Specifically, the relationship between accounting and taxable income that would be published in the financial statements would help investors pinpoint certain trends and discrepancies. Finally, if information about taxable income is useful for the various financial state
36、ment users, the AcSB should address this issue. Participants in a recent conference organized by the Tax Center of the University of North Carolina and the Brookings Institution pressed for the implementation of accounting standards to present the reconciliation of accounting and taxable income in the financial statements.
