Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

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This article investigates whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users.

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22 p.

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Abernathy, John L.; Beyer, Brooke; Gross, Andrew D. & Rapley, Eric T. July 2016.

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  • © 2017, American Accounting Association

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This article investigates whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users.

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22 p.

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Abstract: Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts’ ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification
John L. Abernathy, Brooke Beyer, Andrew D. Gross, and Eric T. Rapley
The Journal of the American Taxation Association 2017; 39(1): 45-66.
https://doi.org/10.2308/atax-51542

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  • Journal of the American Tax Association, 2017. Lakewood Ranch, FL: American Accounting Association

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  • Publication Title: Journal of the American Tax Association
  • Volume: 29
  • Issue: 1
  • Pages: 45-66
  • Peer Reviewed: Yes

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  • October 2014

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  • July 2016

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  • July 2016

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  • Oct. 17, 2017, 7:11 p.m.

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Abernathy, John L.; Beyer, Brooke; Gross, Andrew D. & Rapley, Eric T. Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification, article, July 2016; Lakewood Ranch, Florida. (digital.library.unt.edu/ark:/67531/metadc1035325/: accessed April 23, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT College of Business.