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Topics: Balance sheet, Tax, Taxation Pages: 38 (7796 words) Published: October 12, 2013
The Effect of Deferred Taxes on Firm Market Value:
Evidence from Hong Kong
BY

GAO Fan
09050353
Accounting Concentration

JIANG Wei
09050337
Accounting Concentration

An Honors Degree Project Submitted to the
School of Business in Partial Fulfillment of the
Graduation Requirement for the Degree of
Bachelor of Business Administration (Honors)

Hong Kong Baptist University
Hong Kong

April 2012

Supervisor: Dr. H. K. Daniel Ho

Acknowledgement
We would like to use this opportunity to express our deepest gratitude to our honors degree project supervisor, Dr. H. K. Daniel Ho for his valuable and insightful advice and guidance on our project. We are grateful to him for his time and patience and his care and kindness has encouraged and inspired us through our learning process.

We would also like to thank our friends for their support and encouragement throughout our research process. We sincerely appreciate their kindness and care. We are faithfully gratitude to everyone who has helped and supported us with our project.

Last but not least, we would like to thank our beloved School of Business for providing us with this opportunity to conduct an honors degree project. We not only obtained valuable experience of academic research, but also learned how to cooperate, coordinate and balance through the process of our project.

GAO Fan 09050353
JIANG Wei 09050337

1

Abstract
This study examines empirically the effect of deferred taxes recognized under Hong Kong Accounting Standards (HKAS) 12 on firm market value in Hong Kong stock market. Our empirical model is based on Feltham and Ohlson (1995) Model. Our sample is based on 120 selected companies listed in the Hong Kong Stock Exchange over 2005 to 2010. We document a negative association between deferred tax liabilities (DTL) and firm market value, and a positive association between deferred tax assets (DTA) and firm market value. There is no significant relation between unrecognized deferred tax assets (UDTA) and market value of a firm. Key word: Deferred tax liabilities (DTL), Deferred tax assets (DTA), Unrecognized deferred tax assets (UDTA), HKAS 12

1. Introduction
Accounting for deferred taxes has always been a controversial issue in many nations around the world and it seems that Hong Kong is no exception. While the accounting treatment for current taxes - the unpaid income tax to the tax authorities in current and prior periods - is relatively straightforward, the recognition and measurement of deferred taxes are more subjective. Same with other assets and liabilities, inherently, deferred tax assets and liabilities are what the reporting entity expects to recover or settle in the future. In short, current tax is a past story, whereas deferred taxes deal with uncertainties about the future. The subjectiveness influences investors’ perception of deferred taxes, therefore, we are interested in evaluating how the market views deferred taxes. There are two approaches commonly used for accounting of deferred taxes: the income statement approach and the balance sheet approach. 1.1 Statement of Problems

There are two components of International Financial Reporting Standards (IFRS): -

International Financial Reporting Standards (IFRS) — standards issued after 2001

-

International Accounting Standards (IAS) — standards issued before 2001

2

Starting in 2005, Hong Kong Financial Reporting Standards (HKFRS) are identical to International Financial Reporting Standards (IFRS). The IAS 12: Income Taxes sets guidelines for accounting of deferred taxes and the HKAS 12: Income Taxes1 is the equivalent component of Hong Kong Accounting Standards (HKAS).

The income statement approach focuses on the timing difference between the accounting profit and the taxable profit that originates in one period and reverses in later ones. The income statement approach was the approach taken internationally until the 1990s. The balance sheet approach...
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