Did the FASB's Simplification Initiative Increase Errors in Analysts' Implied ETR Forecasts? Evidence from Early Adoption of ASU 2016-09

What is it about?

Part of the Financial Accounting Standards Board's (FASB) broader initiative to reduce complexity in accounting standards, Accounting Standards Update (ASU) 2016-09 is intended to simplify the accounting for the tax effects of stock-based compensation without impairing the usefulness of accounting information. However, many observers note that the accounting changes under ASU 2016-09 may introduce significant volatility and uncertainty into firms' effective tax rates and, by extension, net earnings. Consistent with this concern, we find that despite their expertise and sophisticated knowledge of tax issues, analysts have more difficulty forecasting firms' effective tax rates after the adoption of ASU 2016-09. Our results suggest that the benefit of simplification came at the cost of a decrease in the predictability of tax-related financial information; as such, this study provides timely evidence on an important economic consequence of ASU 2016-09 that may be of interest to standard setters, researchers, and capital market participants.

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