Did FIN 48 Improve the Mapping between Tax Expense and Future Cash Taxes?

Abstract

The Financial Accounting Standards Board introduced FIN 48 (ASC 740-10) to increase relevance and comparability in the reporting of uncertain tax positions. The extant literature has found mixed results when examining the effects of FIN 48 using research designs that lack a counterfactual. Using a difference-in-differences design, we examine the effect of FIN 48 on the mapping between GAAP tax expense and future cash taxes paid over the next three years. We find that the mapping for US firms improved under FIN 48, and the improvements are strongest among domestic firms, which are less affected by the inability to offset positions under FIN 48. We find no difference in the change in mapping for firms that expect higher or lower ex ante audit and detection risk. We find no evidence that FIN 48 reduced the mapping for firms with a low likelihood of being audited or for multinational firms. Our results are robust to the use of multiple control groups. Our findings suggest that FIN 48 improved the relevance of tax expense for some US firms.

Keywords: FIN 48, ASC 740, unrecognized tax benefits, value relevance, accrual-cash mapping, tax expense, taxes paid

JEL Classification: G18, M41, M48