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Do Firms Eat Their Cookies Before FIN 48 Reveals the Cookie Jar?
Jennifer Blouin, University of Pennsylvania
Cristi Gleason, University of Iowa
Lillian Mills, The University of Texas at Austin
Stephanie Sikes, The University of Texas at Austin
ABSTRACT. FIN 48, Accounting for Uncertainty in Income Taxes, standardizes accounting for uncertain tax benefits and requires companies to disclose their tax reserve amounts. We describe firms’ pre-adoption behavior and investigate whether firms report 2006 tax expense asymmetrically. FIN 48 requires adoption effects to be recorded as an adjustment to opening 2007 retained earnings. Firms with excess reserves should prefer to release them prior to adoption to increase earnings, but firms with reserve shortfalls should prefer to wait until adoption to establish full reserves through retained earnings. We find scant evidence of opportunistic reporting in initial tests. Large-sample regressions suggest that firms are less likely to reduce tax expense to beat analysts’ forecasts in the two quarters before FIN 48 adoption than they were in the prior ten quarters. We also summarize hand-collected disclosures related to tax reserves for 200 firms from 2005 through the first quarter of 2007.
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