| Abstract: | In December, 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.96 (SFAS 96), "Accounting for Income Taxes", to supersede Accounting Principles Board Opinion No.11 (APB 11). In SFAS 96, the Board began to require the liability method to be used for interperiod income tax allocation in place of the deferred method which was previously prescribed by APB 11. Because of the complexity of the requirements in SFAS 96, the FASB deferred the Statement`s effective date three times. At last, the longest transition period of accounting pronouncements in history came to an end. As a consequence, the liability method became mandated, not under SFAS 96, but under a new FASB statement (SFAS No.109) for fiscal years beginning after December 15, 1992, with early adoption encouraged. Thus, SFAS 96`s requirements never formally went into effect, although the provisions about income tax allocation that can be found in SFAS 96 for a large part remain practically unchanged in SFAS 109. At any rate, the unusually lengthy transition period of SFAS 96 allowed a great deal of flexibility for companies to determine when to adopt the new method to account for income taxes. In some ways, both APB 11 and SFAS 96 are similar, because the FASB continued to require comprehensive tax allocation without discounting the deferred liability. However, by requiring the liability method, the Board introduced dramatic changes in the way deferred tax assets, liabilities, and income tax expense were determined. A significant impact on the financial statements of early adopters of SFAS 96 (hereafter early adopters) could have resulted from these changes (Carpenter and Wilburn 1988; Merryman and Robinson 1991). Additionally, because of the lengthy transition period during which both methods were permitted, some were concerned that intercompany comparisons of financial results between early adopters and late adopters might somehow be hindered. |
