In the last 7 parts, i Capital looked at [1]. Is Tax a Distribution of Earnings or a Business Expense? [2]. Accounting Profit versus Taxable Profit, Tax Paid versus Tax Expense, [3]. What is Deferred Tax? [4]. Deferred Tax Under International Accounting Standards (IAS) 12, [5]. IAS 12 (1979) : Timing Difference Method based on [a]. Permanent differences, [b]. Timing differences, [c]. Deferred tax asset and [d]. Deferred tax liability, [6]. IAS 12 (1996): Temporary Difference Method, [7]. Malaysian Accounting Standard Board's MASB 25: Income Taxes and [8]. Issues on MASB 25: Income Taxes.

Conclusion
In Part 7, i Capital showed that if a company continuously invest or incur capital expenditure, it is likely that the deferred tax liability will only reverse out after a considerable period of time. Therefore, the requirement imposed by MASB 25 to recognize all deferred taxes regardless of whether the deferred tax will be reversed in the near future is discriminating against companies where its nature of business involves continuous capital expenditure. Companies of such nature will have to keep recognizing deferred tax liability every year, thus will continuously report lower profit. One of the arguments for the rigid deferred tax recognition requirement is that such future tax consequence (or future tax liability) arises from transactions or events that have occurred in the past. If the tax liability is not taken into consideration in the current year’s account, future shareholders will be penalized when the tax liability subsequently arises. On the other hand, if the chances of the deferred tax liability being reversed are remote, is it not tantamount to penalizing current shareholders by insisting on recognizing a future expense that is not likely to materialise?

Instead of going on and on lambasting the rigidity of MASB 25, allow i Capital to discuss the fundamentals of deferred tax. What is the actual substance of deferred tax? Is deferred tax liability the same as accrued expenses, considering that both form part of a company’s liability? Unknown or disregarded by many, there is a huge difference between the two. Accrued expenses represent amount owed to parties that have rendered their service/s to the company, but have not been paid. Common examples of accrued expenses include accrued rental expenses, accrued salary, accrued commission, etc. In short, accrued expenses represent future liability due to services received but not yet paid. Deferred tax liability, on the other hand, represents future obligation payable not because of past services received. It neither involves flow of services nor flow of cash. It is simply an allocation of “anticipated” future expense in the current year, which is deemed “fair” by the accounting “intellects”.

Following on, does it really matter if a company provides or does not provide for deferred tax liability? A future “anticipated” condition might never materialize due to constant changes in business dynamics (ie purchase of new assets). From a business standpoint, it does not matter whether deferred tax is provided or not. As explained, this is because it does not involve cash flow or service obligations. If that is the case, then, why is there such an obsession in the accounting industry to make such a business-irrelevant issue a must? Will mandating a provision for deferred tax make the annual report more reflective of a company’s underlying performance? If fairness of representation is the main consideration behind the new MASB rulings, it should start with mandating more disclosure in the annual reports, considering the current disclosure is skimpier than G-strings. To quote our managing director, accounting standards are created by non-businessmen to be used by businessmen.

In short, i Capital is of the opinion that companies should be given more leeway in the recognition of deferred tax. If there is reasonable assurance on the company’s part that the deferred tax would not reverse out in the considerable period ahead, then the company should not be “forced” to provide for deferred tax. This is because other than making a company’s reported earnings continuously lower than it actually is, it makes no difference to the fundamentals of a company. With this, i Capital hopes for a review of MASB 25 so as to make it more “adoptable” by the business community. And with this justifiable suggestion, i Capital concludes its exclusive series on deferred tax.