FAS 109/FIN 48
Tax Accounting ASC 740: Income Taxes / FIN 48 (FASB ASC 740–10)
Financial Accounting Standard 109 (FAS 109) – Accounting for Income Taxes
FASB Interpretation No. 48 (FIN 48) – Accounting for Uncertain Tax Positions
Our extensive experience in preparing income tax provisions for both public and private companies makes us eminently qualified to review your company’s tax positions for financial-statement purposes. We can work with your existing auditor to provide the necessary documentation for compliance with these complex rules.
FASB: Midsized companies must revisit “uncertain tax positions.”
The Financial Accounting Standards Board (FASB) recently issued an interpretation that may leave executives at midsized companies scrambling to comply. FASB Interpretation No. 48 (FIN 48) requires companies to rigorously assess the merits of their uncertain tax positions taken on any tax return for any “open” tax year. Generally, tax returns are considered open to audit by taxing authorities for three years, and sometimes as long as six years, following the date they were filed.
What is an uncertain tax position?
All companies seek to legitimately reduce their overall tax burden and minimize or delay cash outflows for taxes. Positions taken in tax returns may be well grounded and in good faith, but with the complexities and varying interpretations of the tax law, these positions may not ultimately prevail. Complexity creates uncertainty regarding the actual benefit a company will receive from a position taken on its tax return. FIN 48 establishes uniform accounting for uncertain tax positions.
Common examples of uncertain tax positions include characterizing gains or losses as capital gains or losses, claiming a tax credit, allocating income between jurisdictions (or not filing a return when a company believes it does not have nexus in a state or country), excluding income the company believes is tax‐exempt, and taking a tax deduction for things such as officers’ compensation and legal expenses.
Compliance deadline is fast approaching
For midsized companies without a large in‐house tax department or the ability to dedicate multiple staff members to a special project, complying with this interpretation could prove daunting, especially for those that file in multiple states and countries.
FIN 48’s aggressive timeline magnifies the problem. For private, non‐public calendar year‐end companies, FIN 48 was effective for 2009. Calendar‐year companies that only issue year‐end annual financial statements may not have to reflect the results of FIN 48 until they issue their financial statements at the end of 2009.
Companies that issue their financial statements based on Generally Accepted Accounting Principles (GAAP) more frequently, such as monthly or quarterly as required by their bank or Securities and Exchange Commission (SEC) rules, must comply with FIN 48 for interim statements as well.
The FIN 48 approach
FIN 48 utilizes a two‐step approach for evaluating tax positions. It addresses the recognition and measurement of income tax positions using a “more likely than not” (MLTN) threshold.
- Step one: recognition. Under FIN 48, the FASB may not recognize a benefit related to an uncertain tax position in the financial statements unless it is MLTN (more than 50 percent probable), the position will be sustained based on its technical merits.
- Step two: measurement. FIN 48 also requires a greater than 50 percent likelihood the position would be sustained if challenged by the taxing authorities and appealed to the highest court in the relevant jurisdiction.
Consider the example of “Company A.” Company A takes a $100 research‐and-development credit on its federal income tax return. Based on past history of similar tax credits, the company’s tax officials believe there’s just a 40 percent likelihood that, if the company was audited, the IRS would allow the entire credit. However, they believe there is at least a 51 percent likelihood the IRS would allow $80 of that credit. The IRS would allow the company to recognize the $80 tax benefit in its financial statements. The remaining $20 would appear as a liability in the company’s financial statements.
Prior to FIN 48, Company A officials might have arrived at their $80 prediction (or some other amount) using various thresholds of probability they deemed appropriate. Likewise, they might have reported the $20 liability in various ways within the company’s financial statements. FIN 48 establishes a uniform approach.
FIN 48 does not require companies to restate liabilities in previously issued financial statements. Instead, the cumulative effect of the change may be presented as an adjustment to the company’s beginning retained earnings in the year of adoption.
Choosing a partner
While some midsized companies will have the time and resources to comply with FIN 48, others will need to seek outside assistance. Publicly traded companies, in particular, may need outside help because of SEC independence rules limiting the assistance the company’s independent auditors can provide. If you choose to select an external partner to help you meet FIN 48 requirements, experts offer the following tips:
- Start your search as early as possible. Many other companies will be seeking similar help to meet the same tight deadlines.
- Ensure your partner is well versed in GAAP as well as in the tax laws and tax case history of each state and country where your company does business.
- Select a partner who can facilitate communication between your auditors, tax professionals, and other external parties. As with any new ruling, it will likely take some time to determine all the documentation requirements and ensure best practices. The more all the players communicate upfront, the less likely of unpleasant surprises down the line.
FIN 48 is applicable to all entities whether they are privately owned, publicly traded, or not‐for‐profit organizations. Can your organization comply with this far‐reaching interpretation?