A historical review of the rise of tax effect accounting as a financial reporting norm

Abstract

This paper deals with one of the most long standing and contentious aspects of company financial reporting: tax effect accounting (TEA). The TEA “life cycle,” its transition from a novelty—emerging as what “ought” to happen due to the “issue” of a newly introduced and problematic corporate tax—to a taken for granted norm in contemporary accounting practice, is explored through a constructivist lens. This investigation reveals that a bundle of factors contributed to the norm’s legitimization, not simply the normative theory that TEA’s “normalising effect” improves the usefulness of financial reports by “correcting” misleading and “unreal” fluctuations in income tax. Once established, the profession can become “captive” by such history. This paper further illuminates TEA’s more recent re-orientation to the balance sheet approach as being consistent with a new emergent norm. This signals incongruence with being purported as a “more complete” reflection, given such a shift can be characterized as a secondary norm with a differentiated purpose.