Deferred taxes are hard for most of us to think about .. who goes around thinking about the two sets of rules and then time differences. Two sets of differences – the human brain doesn’t do so well there. Some are trained to do this, so it probably comes easy to them, I suppose.

Anyway, after just having taught compound financial instruments, including the new guidance in FSP APB14-1, and struggling very merrily with the deferred taxes .. I am wondering why there’s so little discussion on when APIC is the “other half of a journal entry” involving taxes. It was the tech bubble and 2000 before I finally figured out what the credit to APIC was all about for employee stock options (saw it repeatedly in financial statements). Finally my colleague, Robert Freeman, found the one sentence in the (then) APB 25 on the reason for that treatment. Yes, ONE SENTENCE. And if you look at textbooks, there’s often NO discussion of this point .. yet these amounts can be rather large (even now in 2010).

I just spent several hours with this SAME concept (if you can call it that) when i was prepping for my new coverage of bifurcated convertible debt. There, the tax treatment for convertible bonds is no bifurcation, but the GAAP treatment (if the convertible bond can be partially or wholly settled in cash) is to bifurcate. This leads to a DTL which normally would have a debit to income tax expense .. but … here, we debit APIC (as there’s no trigger on the GAAP income statement for the tax expense to offset). I understand this treatment .. but why is it that this fairly important concept / treatment / whatever you might call it is under the radar of discussion. You have to be somebody who sits around thinking about this a lot to get it. WE all know that comprehensive income is viewed as a parking lot for things that cause problems for an income statement (for companies anyway)… but few seem to know a lot about APIC as a “gotta stick it somewhere” ground.

Are the dollar amounts large? Well i haven’t done a comprehensive analysis but for the one company i used in class, HARMON INTERNATIONAL, the amounts are rather large!

Does anybody share my thoughts here?