William A. Ciconte III, Michael P. Donohoe, Petro Lisowsky, Michael A. Mayberry
{"title":"The predictive ability of tax contingencies for future income tax cash outflows","authors":"William A. Ciconte III, Michael P. Donohoe, Petro Lisowsky, Michael A. Mayberry","doi":"10.1111/1911-3846.12910","DOIUrl":null,"url":null,"abstract":"<p>Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under Financial Interpretation No. 48 (FIN 48)—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent 5 years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.</p>","PeriodicalId":10595,"journal":{"name":"Contemporary Accounting Research","volume":"41 1","pages":"355-390"},"PeriodicalIF":3.2000,"publicationDate":"2023-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Contemporary Accounting Research","FirstCategoryId":"91","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/1911-3846.12910","RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under Financial Interpretation No. 48 (FIN 48)—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent 5 years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.
期刊介绍:
Contemporary Accounting Research (CAR) is the premiere research journal of the Canadian Academic Accounting Association, which publishes leading- edge research that contributes to our understanding of all aspects of accounting"s role within organizations, markets or society. Canadian based, increasingly global in scope, CAR seeks to reflect the geographical and intellectual diversity in accounting research. To accomplish this, CAR will continue to publish in its traditional areas of excellence, while seeking to more fully represent other research streams in its pages, so as to continue and expand its tradition of excellence.