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 [email protected].
