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

2014 JATA Conference

The Accounting Review, Vol. 91, No. 4, 2016

23 Pages Posted: 3 Mar 2014 Last revised: 12 Oct 2017

See all articles by Leslie A. Robinson

Leslie A. Robinson

Dartmouth College - Accounting; Dartmouth College - Tuck School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Erin Towery

University of Georgia

Date Written: April 1, 2015

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 unwinds 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.

Keywords: Comparability; Relevance; FIN 48; Income tax uncertainty

JEL Classification: H25, M41, M48

Suggested Citation

Robinson, Leslie and Stomberg, Bridget and Towery, Erin, One Size Does Not Fit All: How the Uniform Rules of FIN 48 Affect the Relevance of Income Tax Accounting (April 1, 2015). 2014 JATA Conference. Available at SSRN: https://ssrn.com/abstract=2401148 or http://dx.doi.org/10.2139/ssrn.2401148

Leslie Robinson (Contact Author)

Dartmouth College - Accounting ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-4018 (Phone)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Erin Towery

University of Georgia ( email )

Terry College of Business
Athens, GA 30602-6254
United States

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