Faculty Publications

Title

Fin48 and income tax-based earnings management: Evidence from the deferred tax asset valuation allowance

Document Type

Article

Journal/Book/Conference Title

Advances in Taxation

Volume

25

First Page

29

Last Page

50

Abstract

This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in the deferred tax asset valuation allowance (DTVA). FIN48 was adopted, in part, over concerns that firms were using the reserve for uncertain tax positions (cushion) to manage earnings. However, there are reasons to believe that the adoption of FIN48 may have impacted the extent to which firms utilize DTVA changes as a strategic accounting choice. As the provision for income taxes is one of the final accounts closed prior to an earnings announcement, income tax accounting is generally regarded as a final opportunity to strategically meet earnings goals. To the extent that FIN48 reduced cushion-based EM, firms may have increasingly used DTVA changes as a substitute. Alternatively, the attention that FIN48 brought to firms’ income tax footnotes may have curbed the strategic use of income tax accounting, in general. This study employs a sample of publicly traded US firms over the period of 2003 2010. A regression model and an analysis of the frequency of DTVA-based EM reveal no evidence of a systematic change in behavior attributable to FIN48. However, further analysis reveals that firms identified as managing earnings to meet analyst forecasts increasingly used discretionary DTVA changes relative to.

Original Publication Date

1-1-2018

DOI of published version

10.1108/S1058-749720180000025002

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

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