The United States has a system of taxation by confession (Hugo Black) and
the Financial Accounting Standards Board has moved the confessional from
the income tax return to the balance sheet
and footnotes. With the implementation of
FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes;” an interpretation of FASB Statement No. 109 (FIN 48)
comes the most significant interpretation
for tax reporting that has been seen in
many years and the implementation date is
right around the corner for SEC filers.
Smart Business talked to Barbara
Catherall, a senior audit manager at Tauber
& Balser, P.C., about the importance of the
new interpretation.
What was the impetus for FIN 48?
Tax positions represent interpretations of
the income tax code. As such, it is easy to
understand the validity of recognizing the
benefit of a tax position in the financial
statements when the degree of certainty
that the position can be sustained is high.
However, the law is often subject to interpretation and whether a tax position can
be sustained can often prove to be difficult
to determine. FASB 109 contains no guidance on assessing the degree of confidence
of sustaining tax positions. Consequently,
a diversity of practice developed and has
resulted in non-comparability in financial
statements.
FIN 48 clarifies the accounting for uncertain tax positions that have been recognized
in the financial statements in accordance
with FASB 109, ‘Accounting for Income
Taxes,’ by developing a recognition threshold and measurement attribute for financial
statement recognition and measurement of
a tax position taken or expected to be taken
in a tax return. In addition, FIN 48 provides
guidance on derecognition, classification,
interest, penalties, accounting in interim
periods, disclosure and transition.
How are tax positions evaluated?
First, evaluate the position for recognition.
The company should recognize the effects
of a tax position in its income statement if the position will more likely than not be sustained on examination by the relevant tax
authority. The term ‘more likely than not’ is
a likelihood of more than 50 percent which
is the same criterion used to evaluate
whether a deferred tax asset is realizable.
An entity should not recognize any income
statement benefit for a tax position if the
more-likely-than-not threshold is not met.
Entities should base their analysis of the
more-likely-than-not threshold only on the
technical merits of the tax position. In making this analysis, an enterprise should presume that the tax position will be examined
and evaluated by the relevant tax authority
with full knowledge of all relevant information. The company must also assess the
technical merits of the tax position based on
the weight of the relevant tax law authorities at the reporting date. Each tax position
must be evaluated individually. FIN 48 prohibits offsetting the positions against each
other or aggregating positions.
What provides guidance concerning technical merits?
The authority for tax law can be found in
legislation, statutes, legislative intent, regulations, rulings and case law. A company
can also consider prior administrative practices and precedents established by
the relevant tax authority if they are widely understood. For instance, many tax
authorities have indicated by historical
administrative practices and precedents
that they will not challenge an entity’s capitalization policy of deducting insignificant
assets, even though the tax law may not
prescribe a capitalization threshold or contain a materiality provision.
What types of issues are included in tax positions?
Tax positions can include the following:
- A decision not to file a tax return in a
jurisdiction - The allocation of income between jurisdictions
- The characterization of income in the tax
return - A decision to exclude taxable income in
the tax return
What happens when the tax return basis is
different than the result of applying FIN 48?
Any difference arising between the
amount that a company recognizes by
applying FIN 48 and the amount reported,
or expected to be reported, on its tax
return results in a liability for unrecognized
tax benefits (a FIN 48 liability) that should
be classified as current for those amounts
expected to be paid within one year. It is
not classified as a deferred tax liability.
FIN 48 is effective for fiscal years beginning after December 15, 2006. This means
that SEC calendar year filers need to consider FIN 48 when preparing their first
quarter 2007 filings.
BARBARA CATHERALL is a senior manager providing service
to both the Forensic and Audit departments at Tauber & Balser,
P.C. She has more than 20 years of public accounting experience
for both publicly and privately-held companies in the professional services, retail, wholesale distribution, manufacturing, health
care, real estate, not-for-profit and construction industries. Reach
her at [email protected] or (404) 814-4961.
