Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance by Charles W. Mulford & Eugene E. Comiskey

Author:Charles W. Mulford & Eugene E. Comiskey
Language: eng
Format: mobi
Publisher: Wiley
Published: 2007-07-22T18:30:00+00:00

Disclosure and Detection of Delayed or Deferred Tax Payments or Receipts (Benefits)

Although they may appear to be the same, the sources of delayed versus deferred tax payments or receipts are quite different. Delayed tax payments or receipts are the simple product of differences between the timing of the recognition and realization of certain tax provisions or benefits. However, deferred tax payments and receipts are the product of temporary differences between book and tax return earnings.

Delayed Tax Payments or Receipts The most common form of delayed tax payment results from differences between the accrual of current tax provisions or benefits and their payment or receipt. The tax law surrounding the timing of tax payments in the United States was discussed in the opening section of this chapter. The lag between recording and the subsequent tax payment or receipt often pushes some of the cash movement into a subsequent period. This delay may be more pronounced when firms have taxable units in other countries. Moreover, the typical disclosure of these payments and receipts often makes it difficult to detect the actual cash movement. However, for most large U.S. firms, without significant foreign operations, installment payments of expected taxes during the year should result in only a limited delay of payments or receipts.

The concern about material delayed tax payments or receipts is that they might create a significant spread between reported and sustainable cash flow produced in a given period. American Greetings Company presents just such a possibility. American Greetings disclosed a $144 million tax charge in fiscal 2001. The charge was related to a contested income tax issue. This charge to the income statement was offset by an increase in taxes payable. However, substantial payment on this obligation was not made until fiscal 2003. American Greetings noted that a $106 million decrease in accounts payable and other liabilities, including income taxes payable, in fiscal 2003 was “primarily to settle the disputed income tax liability associated with the Corporation’s company owned life insurance (COLI) program.”62

The detection of this delayed tax payment provides a model for investigating similar transactions. The tracks detected in five locations included:

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