The impact of the deferred tax adjustment on the Economic Value Added (EVA) measure

  • Received April 29, 2017;
    Accepted September 21, 2017;
    Published November 13, 2017
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.14(3-1).2017.07
  • Article Info
    Volume 14 2017, Issue #3, pp. 227-242
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Economic Value Added (EVA) is a value-based accounting measure used by companies to measure the amount of value created for shareholders. EVA requires the conversion of accounting values to economic values. This conversion process is known as the EVA adjustment. If accounting values are not converted to economic values, the value of the EVA can be distorted. Previous studies have shown that companies are experiencing difficulties in implementing EVA adjustments. To reduce these difficulties, companies have decided to limit their EVA adjustments to ten or even fewer. The research problem is that if the appropriate adjustments are not made, an inaccurate EVA measure will be calculated.

The aim of the research is to measure whether deferred taxes impact EVA. The study is conducted within a quantitative research paradigm. Secondary data analysis was carried out on JSE-listed food producers over a seven-year period, from 2004 to 2010. The unadjusted EVA was compared to the adjusted EVA measure to determine the before and after effects of deferred taxes on EVA. The findings of the study revealed that deferred taxes either understated or overstated the value of the EVA during the period 2004–2010. In addition, the results from the regression analysis revealed an overall significance for all deferred tax predictors. The results from the study showed that deferred tax had a significant impact on the value of EVA. Therefore, the study recommends that companies implement the deferred tax adjustment on EVA.

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    • Figure 1. Increases and decreases in deferred tax expenses (Rand values in 000’s)
    • Figure 2. The unadjusted NOPAT and the adjusted NOPAT (Rand values in 000’s)
    • Figure 3. Deferred tax liabilities (Rand values in 000’s)
    • Figure 4. The unadjusted TCE and the adjusted TCE (Rand values in 000’s)
    • Table 1. Multiple regression model of the unadjusted EVA
    • Table 2. ANOVA test for overall significance
    • Table 3. Coefficient test for individual significance
    • Table 4. Multiple regression model of the adjusted EVA
    • Table 5. ANOVA test for overall significance
    • Table 6. Coefficient test for individual significance