Did FIN 48 improve the mapping between tax expense and future cash taxes?

One Size Does Not Fit All: How the Uniform Rules of FIN 48 Affect the Relevance of Income Tax Accounting

The Accounting Review ◽

10.2308/accr-51263 ◽

2015 ◽

Vol 91 (4) ◽

pp. 1195-1217 ◽

Cited By ~ 27

Author(s):

Leslie A. Robinson ◽

Bridget Stomberg ◽

Erin M. Towery

Keyword(s):

Income Tax ◽

Predictive Ability ◽

Cash Flows ◽

Measurement Process ◽

Fin 48 ◽

Accounting Rules ◽

Jel Classifications ◽

Tax Accounting ◽

Tax Expense ◽

Tax Uncertainty

ABSTRACT Our study examines how the uniform rules of FIN 48, which governs accounting for income tax uncertainty, affect the relevance of income tax accounting. By requiring all firms to follow the same recognition and measurement process, the FASB intended FIN 48 to improve the relevance of income tax accounting. However, practitioners argue that reserves reported under FIN 48 lack relevance because they represent liabilities that will never be paid to tax authorities. Consistent with these concerns, we estimate that over a three-year period, only 24 cents of every dollar of reserves unwind via settlements. Moreover, contrary to the FASB's intention, we find no evidence that FIN 48 increased the ability of tax expense to predict future tax cash flows. Rather, we find that the predictive ability of tax expense for future tax cash flows decreases among firms for which FIN 48 is most restrictive. Finally, we find no evidence that investors identify firms for which reserves overstate future tax cash outflows and incorporate this into their valuations. Our results provide evidence that the uniform accounting rules of FIN 48 negatively affect the relevance of income tax accounting. JEL Classifications: H25; M41; M48.

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Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

Journal of the American Taxation Association ◽

10.2308/atax-51542 ◽

2017 ◽

Vol 39 (1) ◽

pp. 45-66 ◽

Cited By ~ 2

Author(s):

John L. Abernathy ◽

Brooke Beyer ◽

Andrew D. Gross ◽

Eric T. Rapley

Keyword(s):

Forecast Accuracy ◽

Tax Avoidance ◽

Financial Accounting ◽

Tax Rates ◽

Financial Accounting Standards Board ◽

Effective Tax Rates ◽

Fin 48 ◽

Income Statement ◽

Tax Benefits ◽

Tax Expense

ABSTRACT Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts' ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

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