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

Abstract

Our study uses accounting for income tax uncertainty (FIN 48) to examine how rules intended to increase uniformity affect relevance. 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 reflect liabilities that will never be paid to taxing authorities. Consistent with these concerns, we estimate that only 24 cents of every dollar of reserves is paid in cash. Moreover, contrary to the FASB’s intention, we find no evidence that FIN 48 increased the relevance of income tax expense, but rather decreased relevance among firms for which FIN 48 is most restrictive. Finally, we find no evidence that investors identify firms for which reserves overstate future cash outflows and incorporate this into their valuations. Our results suggest uniform accounting rules can adversely affect the relevance of accounting information.