Pre-empting Disclosure? Firms' Decisions Prior to FIN 48

The Accounting Review, Vol. 85, No. 3, May 2010

Posted: 18 Mar 2008 Last revised: 25 Jan 2014

See all articles by Jennifer Blouin

Jennifer Blouin

University of Pennsylvania - Accounting Department

Cristi A. Gleason

University of Iowa - Department of Accounting

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Stephanie A. Sikes

University of Pennsylvania - Accounting Department

Date Written: September 18, 2009

Abstract

FIN 48, Accounting for Uncertainty in Income Taxes (FASB 2006), requires firms to disclose tax reserves and to record changes in tax reserves at adoption of FIN 48 as cumulative effect adjustments in stockholders’ equity. We predict that between the enactment and adoption of FIN 48, relative to historical levels, firms settle disputes more often to potentially decrease visibility to the IRS and release reserves more often to reduce scrutiny and increase earnings (as opposed to retained earnings). We analyze 2005 and 2006 10-Qs and 10-Ks for the 100 largest nonfinancial, nonutility firms followed by analysts. Between enactment and adoption of FIN 48, relative to historical levels, firms report more settlements with tax authorities and release reserves more frequently. In addition, firms with higher IRS deficiencies are more likely to settle disputes. Between enactment and adoption of FIN 48, firms increased earnings by releasing $4.4 billion of tax reserves, nearly equaling the $4.5 billion released at adoption.

Keywords: tax compliance, FIN 48, accounting for income taxes, disclosure

JEL Classification: C72, H25, M41, M43, M44, M45

Suggested Citation

Blouin, Jennifer and Gleason, Cristi A. and Mills, Lillian F. and Sikes, Stephanie A., Pre-empting Disclosure? Firms' Decisions Prior to FIN 48 (September 18, 2009). The Accounting Review, Vol. 85, No. 3, May 2010, Available at SSRN: https://ssrn.com/abstract=1106713

Jennifer Blouin

University of Pennsylvania - Accounting Department ( email )

1315 SHDH
3620 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Cristi A. Gleason

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Stephanie A. Sikes (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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