Date of Graduation

12-2019

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Accounting

Advisor

T.J. Atwood

Committee Member

Jonathan Shipman

Second Committee Member

Cory Cassell

Keywords

FIN 48, Indemnification, Mergers, Mirror Accounting, Taxation, Uncertain Tax Benefits

Abstract

Tax indemnification transfers from a firm to an outside party the risk of potential cash settlements associated with uncertain tax positions taken in prior years. The current accounting treatment of tax indemnification under Accounting Standards Codification (ASC) 805 and the required disclosures for uncertain tax positions under ASC 740 provide little or no information regarding this risk transfer in the financial statements or notes. I examine merger and acquisition (M&A) contracts from 2008 through 2013 and find that tax indemnification is commonly present in M&A transactions. I then provide evidence that the association between current uncertain tax benefit reserves and future tax cash outflows is positive for firms that do not have indemnified tax positions but is not significant for firms that do have indemnified tax positions. Because the use of tax indemnification and tax insurance is becoming more common among U.S. firms and this trend is expected to continue, my results suggest that changes in the accounting treatment of uncertain tax positions and/or additional financial statement disclosures may be necessary to allow financial statement users to adequately assess the impact of uncertain tax positions when tax indemnification or tax insurance is present.

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