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

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: Suggested Citation

Blouin, Jennifer and Gleason, Cristi A. and Mills, Lillian F. 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