Financial Accounting Standards Board Interpretation 48 (FIN 48) is a new tax initiative that significantly alters how companies account for uncertain tax positions. The new rules intended to increase the comparability of financial statements also expand documentation requirements.
“New disclosure requirements provide for companies to set forth in their tax footnotes a complete discussion of the impact of FIN 48, including the impact of potential interest and penalties on potential tax deficiencies,” says Gil Greene, vice president of Gumbiner Savett Inc.
While meeting FIN 48 requirements may prove to be challenging, companies can benefit from implementation of the initiative. FIN 48 provides the opportunity to enlighten a firm’s management and shareholders about historical business and tax operations.
Smart Business spoke with Greene about FIN 48, why the initiative was adopted, and how it is expected to improve financial reporting and increase transparency.
What is FIN 48?
Financial Accounting Standards Board Interpretation 48, Accounting for Uncertainty in Income Taxes, was issued in July 2006 as an interpretation of FASB 109, which sets forth the standards for accounting for income taxes under GAAP (Generally Accepted Accounting Principles). FIN 48 was first effective for financial statements of public companies issued in fiscal years beginning after Dec. 16, 2006, and is scheduled to become effective for private companies, beginning after Dec. 15, 2007. Thus, privately held companies do not have to implement FIN 48 in their 2007 financial statements but, nevertheless, should be looking ahead in order to be ready when the date for implementation arrives.
Why was this initiative adopted?
FIN 48 was adopted in order to clarify accounting for uncertain tax positions in financial statements. Tax laws, in some cases, are subject to varied interpretation, and whether a tax position will be ultimately sustained may be uncertain. As a result, diverse accounting practices have developed leading to inconsistency in accounting for such positions. This diversity in practice has resulted in noncomparability in financial statement reporting of income tax assets and liabilities.
How is FIN 48 expected to improve financial reporting and increase transparency with respect to tax matters?
FIN 48 introduces new standards for identification and measurement of tax benefits associated with uncertain tax purposes. A tax position refers to a position taken in a previously filed return or a return to be filed in connection with a current reporting period and also includes, for example, decisions to not file returns, shifts of income between jurisdictions and decisions to exclude certain types of income from returns. Issuers of financial statements are required to inventory all uncertain tax positions for all jurisdictions for all open years. A ‘more likely than not’ threshold is required in order to record a tax benefit in the financial statements with respect to an uncertain tax position. Positions satisfying this ‘more likely than not’ standard must be further analyzed to determine the percentage likelihood (i.e. between 51 percent and 100 percent) of being sustained, assuming an audit by the income tax authority having full knowledge of all relevant facts.
How might the implementation of FIN 48 result in disagreements between company management and external auditors?
Because the implementation of FIN 48 requires that judgment be applied in areas subject to varying interpretations, it is reasonable to expect that disagreements may arise between management and auditors. Public companies are often sensitive to items impacting their reported earnings, and therefore, may resist acknowledging an uncertain tax position that might give rise to a higher than anticipated tax expense. Private company shareholders may be more focused on tax savings than public company shareholders and may take more aggressive tax positions, leading to disagreement with auditors.
Does FIN 48 heighten the risk of being audited by the IRS or by a state or international tax authority?
It is too soon to know for sure what the impact of FIN 48 will be on the audit process, but certainly the disclosure requirements will provide a road map for tax authorities to follow in requesting information about tax issues. On the bright side, FIN 48 will require companies to take a fresh look at their tax positions and may enlighten management and shareholders about the importance of managing tax risk.
GIL GREENE is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or firstname.lastname@example.org.