Should Financial Reporting Follow Tax Legislation?
During the 1960s and 1970s, the U.S. Congress used a tax measure known as the investment tax credit to encourage companies to expand their investment base. Under these provisions,companies received reductions of their tax liabilities based on a percentage of newinvestments in noncurrent operating assets. This approach was used in lieu of reducing taxrates as a stimulus to expansion. In 1981, the adoption of the ACRS method of cost allocationfor noncurrent operating assets added further stimulation to the economy by permittingcompanies to write off the cost of their property over a shorter than normal period.In 1986, Congress passed a massive Tax Reform Act that significantly reduced tax ratesfor all taxpaying entities. At the same time, the investment tax credit was eliminated andthe ACRS legislation was replaced by a modified ACRS approach that lengthened the timeperiod for the allocation. These latter provisions reduced the net impact of the reduced taxrates. Because elected government officials do not like to be identified with increased taxrates, there remains the possibility that further modifications to tax accounting for noncurrentoperating assets will be made.Should financial reporting for noncurrent operating assets be affected by tax legislation?Support your answer.