The Usefulness of Income Tax Disclosures Under IFRS versus U.S. GAAP for Predicting Changes in Future Earnings and Cash Flows

Abstract

We examine whether income tax disclosures under International Financial Reporting Standards (IFRS) are useful for predicting changes in future earnings and cash flows, and whether such disclosures are more or less useful than disclosures made under U.S. Generally Accepted Accounting Principles (GAAP). We find that the ranked ratio of taxable income (minus taxes)-to-net income (i.e., the tax-book ranking) is useful for predicting changes in future earnings and cash flows under both IFRS and U.S. GAAP. However, the usefulness of this ratio differs between IFRS firms and U.S. GAAP firms only following the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This suggests that tax information is more useful for predicting future performance under IFRS than under U.S. GAAP, and that the usefulness of the tax-book ranking for predicting future performance was reduced for firms reporting under U.S. GAAP following the adoption of FIN 48. Finally, our results suggest that tax disclosures are useful for detecting differences in earnings quality across firms reporting under IFRS and U.S. GAAP.