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Impact of Deferred Taxes on Net Income for ACME

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Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney's first job with Acme was the review of the company's accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time.

Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to "defer" all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she's uncomfortable with the ethics of it.

Instructions

Answer the following questions.
(a) Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
(b) What are the ethical implications of Acme's "deferral" of income taxes?
(c) Who could be harmed by Acme's ability to "defer" income taxes payable for several years, despite positive earnings?
(d) In a situation such as this, what are Ms. Delaney's professional responsibilities as a CPA?

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Solution Preview

(a) This explicit policy ensures that all employees concerned are properly informed of when to dispose properties such that the company can have 100% control of its cash flows. Remember that missing the required target disposal date of a property even by a single day triggers the payment of the related deferred tax liability for the company.
(b) The ethical consideration of Acme's practice of deferring income taxes is by aggressively managing its taxes, ...

Solution Summary

Almost 300 words discuss the impact of deferred taxes on net income along with ethical implications.

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