The Relationship between Tax Income and Accounting Conservatism

Conservatism as one of the most important topics in theory and practice of accounting has attracted the attention of many researchers in the world. Watts (2003a) provides four explanations for the accounting conservatism; contracting (debt contracts، executive contracts، and firm governance)، shareholder litigation، accounting regulation، and taxation. The first three explanations are supported in the existing literature. However، few studies have examined the relation between taxation and accounting conservatism. This study examines the influence of tax declared and government- assessed Income tax on accounting conservatism. To investigate this relationship، the multivariable regression model was used and for the operating conservatism definition، the Feltham and Ohlson (1995) model has been used، and for the tax cost، declared corporation tax is used. Findings of investigation of 1076 firm-years listed in Tehran Stock Exchange in the 2002 to 2012 by unbalanced Panel model، suggest that by 99% confidence level، relation between tax declared and the conservatism is positive and significant but the relation between Government- assessed tax Income and conservatism was not significant. Furthermore، these relations in first and forth quartile of firms that are grouped on the basis of conservatism exist with more significance. Accordingly consistent with the theoretical basis it can be concluded that tax cost is one of the motivations of applying accounting conservatism. In other words، accounting conservatism is one of the instruments that companies used in order to reduce their tax cost.