Journal of
Accounting and Taxation

  • Abbreviation: J. Account. Taxation
  • Language: English
  • ISSN: 2141-6664
  • DOI: 10.5897/JAT
  • Start Year: 2009
  • Published Articles: 206

Full Length Research Paper

Does the importance of relevance and faithful representation differ between GAAP and tax reporting? A discussion of the trade-offs between cash-basis, accrual-basis, and fair value accounting methods

Sarah C. Lyon
  • Sarah C. Lyon
  • Accounting Department, University of San Diego School of Business, San Diego, CA USA.
  • Google Scholar
Timothy Kelley
  • Timothy Kelley
  • Accounting Department, University of San Diego School of Business, San Diego, CA USA.
  • Google Scholar
Loren Margheim
  • Loren Margheim
  • Accounting Department, University of San Diego School of Business, San Diego, CA USA.
  • Google Scholar


  •  Received: 11 February 2021
  •  Accepted: 13 July 2021
  •  Published: 31 July 2021

Abstract

This paper explains the trade-offs between the relevance and faithful representation of accounting information analyzed in the contexts of the cash-basis, accrual-basis, and fair value accounting methods used to prepare financial statements for Generally Accepted Accounting Principles (GAAP) and tax reporting. Discussion of the role of the relevance and faithful representation of accounting information is generally separate from any discussion of the trade-offs between cash-basis, accrual-basis, and fair value accounting methods, and the different needs and priorities of the users of GAAP and tax reporting information. The study contributes to the literature by suggesting how the importance of relevance and faithful representation differs between GAAP reporting and tax reporting, and how the allowable accounting methods for GAAP and tax reporting align with the differing emphasis on relevance and faithful representation. We review the reporting requirements established by regulators in light of these trade-offs and discuss how the needs of external users of the reporting information shape the allowable accounting methods for GAAP and tax reporting.

 

Key words:  Relevance, faithful representation, cash-basis, accrual-basis, fair value, GAAP, tax reporting.