Did FIN 48 Improve Comparability in the Financial Reporting of Income Taxes?

• In Event: Ongoing Research Session II

Abstract

This study investigates whether Financial Accounting Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, improved comparability in the financial reporting of income tax expense. This research is important because it provides evidence on whether the standard achieved one of its stated benefits (improved comparability in accounting for income taxes). It also provides evidence useful to market participants in evaluating the decision usefulness of reported tax information. Using a comparability measure developed by De Franco et al. (2011), we find that FIN 48 improved the comparability of income tax expense for firms with more tax uncertainty (i.e., tax aggressive firms and firms with foreign operations). In contrast, we find no evidence indicating an improvement in tax expense comparability for firms with aggressive tax and financial reporting. These results suggest that improved consistency in the measurement and recognition of uncertain tax benefits under FIN 48 led to an improvement in income tax expense comparability for firms most likely to have greater uncertain tax positions. At the same time, however, these results provide no support for the SEC’s pre-FIN 48 concerns regarding management’s ability to use the tax reserve to opportunistically manage earnings.

Authors

• John Phillips, University of Connecticut

• Valerie Tellez, University of Connecticut