The value relevance of deferred tax attributed to asset revaluations

Our study focuses on the incremental value relevance of the balance sheet relative to the income statement approach to deferred tax accounting and whether such value relevance is attributable to firms being required to report the deferred tax consequences of asset revaluations. Our results suggest that the increment to deferred tax balances upon adopting the balance sheet approach has value relevance, with such value relevance driven by the deferred taxes on certain asset revaluations (specifically, property, plant and equipment, and equity-accounted investments). We interpret our results as reflecting investors’ preference for the balance sheet approach to deferred tax accounting and their view that deferred taxes on asset revaluations are real liabilities.