FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in

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					FASB Interpretation No. 48
               (FIN 48)
 Accounting for Uncertainty in
       Income Taxes
    an interpretation of FASB Statement No. 109

    Presented by Anthony Dodds, CPA, MST
 Director of SEC/Public Company Audit Services
        Malin, Bergquist & Company, LLP
      FIN 48 Overview / The Basics
   Issued in June of 2006, this FASB Interpretation clarifies the accounting for uncertainty in
    income taxes recognized in an enterprise’s financial statements in accordance with FASB
    Statement No. 109, Accounting for Income Taxes.

   Effective Date: For fiscal years beginning after December 15, 2006 (public companies only).

   On November 7, 2007, the FASB voted to defer the effective date of FIN 48 for all non-
    public entities to periods beginning after December 15, 2007. The FASB instructed the staff
    to develop a FASB Staff Position which had a 30-day comment period once released. This
    action was in response to a letter issued by the Private Company Financial Reporting
    Committee that recommended that FASB delay the effective date of FIN 48.

   On February 1, 2008, FSP FIN 48-2 Effective Date of FASB Interpretation No. 48 for Certain
    Nonpublic Enterprises was issued. This FSP defers the effective date of FIN 48 for nonpublic
    enterprises to the annual financial statements for fiscal years beginning after December 15,
    2007. FSP 48-2 notes that, when effective (for nonpublic entities), FIN 48 should be
    applied as of the beginning of the enterprise’s fiscal year.
     FIN 48 Overview / The Basics
   This Interpretation clarifies the accounting for uncertainty in income
    taxes recognized in an enterprise’s financial statements in accordance
    with FASB Statement No. 109, Accounting for Income Taxes.
   Statement 109 does not prescribe a recognition threshold or
    measurement attribute for the financial statement recognition and
    measurement of a tax position taken in a tax return.
   The requirements of this Interpretation apply to not-for-profit
    organizations. This Interpretation also applies to pass-through
    entities and entities whose tax liability is subject to 100 percent credit
    for dividends paid (for example, real estate investment trusts and
    registered investment companies) that are potentially subject to
    income taxes.
              Areas of Focus
FIN 48 Principles

Key Implementation Considerations

Process and Control Considerations

Implementation Examples (refer to hand-outs)
                   FIN 48 Principles
                    •   FIN 48 applies to all income tax positions including those
Scope
                        recorded as a result of business combinations
                    •   Appropriate Unit of Account for a tax position is a matter of
Unit of Account
                        judgment
                    •   The application of FIN 48 requires a 2-step process that
Two-Step Process
                        separates recognition from measurement
                    •   A tax benefit is recognized when it is “more likely than not” to
Recognition
                        be sustained based on the technical merits of the position
                    •   For those positions that meet the recognition threshold, record
Measurement             the largest amount of tax benefit that is greater than 50% likely
                        of being realized (cumulative probability concept)
                    •   Occurs when ANY of the following are met:
                         • The “more likely than not” threshold is met by the
Subsequent               reporting date
Recognition              • The tax matter is ultimately settled through negotiation or
                         litigation
                         • The statute of limitations expires
               FIN 48 Principles (Cont.)
Subsequent       •   Derecognize a previously recognized tax position when it is no longer “more likely
Derecognition        than not”
or Change in     •   Change in measurement should also be reflected in the period that such change
Measurement          occurs
                 •   New information vs. new evaluation
                 •   Interim reporting considerations
Change in
                        • Discrete item, or
Judgment
                        • Taken into account over the remaining periods in the year pursuant to APB
                        28 and FIN 18
                 •   Interest is a period cost
Interest and     •   Accrue statutory penalties when a tax position does not exceed the minimum
Penalties            statutory threshold required to avoid penalties
                 •   Classification of interest and penalties is an accounting policy election
                 •   Classify difference between tax benefit reflected in tax return and amount recorded
                     in the financial statements as either:
                         • A reduction of a deferred tax asset (DTA)
Classification
                         • A current or non-current liability
                 •   Only liability that should be classified as a deferred tax liability (DTL) is one
                     arising from a taxable temporary difference that meets the recognition threshold
             FIN 48 Principles (Cont.)
                 •Tabular   roll-forward
                          for which it is reasonably possible the total amount of
                 •Positions
Disclosures      unrecognized tax benefit will significantly increase or decrease within
                 twelve months of the reporting date
                 •Interim   disclosures may be required


                 •Cumulative  effect is reported as an adjustment to the opening balance of
                 retained earnings (or other appropriate components of equity or net assets
                 on the Balance Sheet)
Transition
                 •Adjustments  related to tax positions resulting from business combinations
                 are not included in the Cumulative Effect Adjustment
                 •Consider    SAB 74 disclosure requirements

                 •Fiscal   years beginning after December 15, 2006 (public)
Effective Date
                 •Fiscal   years beginning after December 15, 2007 (non-public)
                    FIN 48 Principles
   Differences between tax positions taken in a tax return and amounts
    recognized in the financial statements will generally result in one of
    the following:
    a. An increase in a liability for income taxes payable or a reduction of an income
        tax refund receivable
    b. A reduction in a deferred tax asset or an increase in a deferred tax liability
    c. Both (a) and (b).

   The appropriate Unit of Account for a tax position is a matter of
    judgment and requires consideration of:
    a. The manner in which the enterprise prepares and supports its income tax
        return, and
    b. The approach the enterprise anticipates the taxing authority will take during an
        examination.
                          FIN 48 Principles
   The term tax position refers to a position in a previously filed tax return or a
    position expected to be taken in a future tax return (e.g., a DTA / NOL) that is
    reflected in measuring current or deferred income tax assets and liabilities for
    interim or annual periods.

   A tax position can result in a permanent reduction of income taxes payable, a
    deferral of income taxes otherwise currently payable to future years, or a change in
    the expected realizability of DTA’s.

   The term tax position also encompasses, but is not limited to:
    a. A decision not to file a tax return (e.g., in a state or international jurisdiction)
    b. An allocation or a shift of income between jurisdictions
    c. The characterization of income or a decision to exclude reporting taxable income in a tax return
    d. A decision to classify a transaction, entity, or other position in a tax return as tax exempt.
Implementation Considerations
•   FIN 48 applies to all income tax positions
•   Distinguish between “highly certain” and
    “uncertain” tax positions
      - Highly certain tax positions
      - Based on clear and unambiguous tax law
•   Clearly meet MLTN recognition standard and
    greater than 50% likely that 100% of benefit
    will be sustained
•   Level of analysis under FIN 48 may vary
    based upon the nature of the position
Implementation Considerations –
Recognition
  • An enterprise shall initially recognize the
    financial statement effects of a tax position
    when it is more likely than not, based on the
    technical merits, that the position will be
    sustained upon examination.

  • As defined in the Interpretation, the term more
    likely than not means a likelihood of more than
    50 percent; the terms examined and upon
    examination also include resolution of the
    related appeals or litigation processes, if any.
Implementation Considerations –
Recognition
 •   Conclusion regarding financial statement
     recognition takes into account tax technical
     merits, facts and circumstances
 •   Assess the accuracy of facts and assumptions
     – Review the execution of structuring and planning
 • Consider “widely understood” administrative
     practices and precedents of the taxing authority
 •   Consider applicability of recognition analysis to
     temporary differences
     – Technical merits of deduction itself vs. timing of deduction
Implementation Considerations -
Measurement
 • Determination and scheduling of possible
  outcome amounts and percentage likelihood
  associated with each amount
   – Requirement to identify multiple outcomes and assign
     related individual probabilities may not apply for all tax
     positions

 • Basis for conclusions regarding amounts and
  probabilities could include
   – Reports issued by tax authorities to settle the issue in prior
     years
   – Evidence of tax authority administrative practices and
     precedents with acceptance of settlement practices
   – Changes in tax law, regulations, or rulings that might
     impact the applicability of a prior settlement
Implementation Considerations -
Change in Judgment
•If the recognition threshold is not initially met,
                                                  FIN 48
lists three conditions which indicate that the tax position
should be subsequently recognized, including:
   –The tax matter is “ultimately settled” through negotiation or
   litigation
•Derecognize a previously recognized tax position in the
first period that it is no longer MLTN
•Changes in measurement should also be reflected in
the period that such change occurs
•Record effects of change in judgment in interim financial
statements
   –Estimated annual effective rate vs. discrete event
Implementation Considerations -
Change in Judgment (cont.)

 • Subsequent changes in judgment are based
  upon new evidence:
   – Evaluate facts, technical merits and other circumstances
     for on-going applicability
   – Timely identification and documentation of events that
     result in change in judgment
   – Determination of whether changes are caused by new
     information or by information that might have been
     “otherwise knowable” in an earlier reporting period
Implementation Considerations -
Interest and Penalties
• Interest accrual is based upon the difference between the
  amount of tax benefit recognized in the financial
  statements and the amount recognized in the tax return.

• Interest and penalties for unrecognized tax benefits are
  to be accrued under the applicable statute.

• Classification of interest and penalties is an accounting
  policy election and they may be classified in the financial
  statements as either income taxes or another expense
  classification, based on the accounting policy election of
  the enterprise. Those elections shall be consistently
  applied.
Implementation Considerations -
Classification

   Classification as current or non-current liability based
    upon expected timing of payment (settlement)

    Tracking of FIN 48 tax basis
    - Reclassification of deferred income tax liabilities
    - Deferred tax assets recorded as result of
       unrecognized tax benefits
   Interaction of FIN 48 and deferred tax asset
    valuation allowance assessment
Implementation Considerations –
Cumulative Effect Adjustment

   FIN 48 did not change current guidance
    regarding classification of subsequent
    adjustments to tax positions acquired in a
    purchase business combination

   Consider treatment for interest attributable to
    pre- and post-business combination date
Implementation Considerations -
Disclosures
   An enterprise shall disclose its policy on classification of interest and
    penalties

   Tabular roll-forward reconciliation of the total amounts of
    unrecognized tax benefits at the beginning and end of the period,
    which shall include at a minimum:

    (1) The gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax
    positions taken during a prior period
    (2) The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax
    positions taken during the current period
    (3) The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing
    authorities
    (4) Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
Implementation Considerations -
Disclosures
   Consider technology requirements for tracking uncertain
    tax positions and related deferred assets and liabilities
   Reconciliation of disclosures with trial balance
   Twelve month look-forward
   Process to identify and monitor potential events that could
    occur within 12 months, e.g.,
           Change in exam status
           Statute of limitations
           Legislation
   Consider, for public companies, Reg. S-X quarterly
    disclosure requirements (refer to hand-out)
    Implementation Considerations -
    Disclosures
   The total amount of unrecognized tax benefits that, if recognized, would affect the
    effective tax rate

   The total amounts of interest and penalties recognized in the statement of
    operations and the total amounts of interest and penalties recognized in the
    statement of financial position

   For positions for which it is reasonably possible that the total amounts of
    unrecognized tax benefits will significantly increase or decrease within 12 months
    of the reporting date:
    (1) The nature of the uncertainty
    (2) The nature of the event that could occur in the next 12 months that would cause the change
    (3) An estimate of the range of the reasonably possible change or a statement that an estimate of the
    range cannot be made

   A description of tax years that remain subject to examination by major tax
    jurisdictions.
  Process and Control Considerations
Completeness
      All uncertain tax positions are identified
      All relevant factors pertaining to uncertain income tax positions
       are identified, gathered and considered and their effects are
       recognized within the appropriate period

Existence and Occurrence
      Initial or subsequent recognition and measurement occurs in the
       period in which it becomes MLTN
      Derecognition occurs when no longer MLTN
      Facts, technical merits and other circumstances are evaluated for
       continuing applicability
 Process and Control Considerations
 (cont.)
Valuation and Measurement
      Appropriate potential outcome amounts and probability assignments are used in
       measurement
      Third party opinions and other bases for judgments are factual, reliable, and
       current
      Subsequent changes in judgment are based upon new evidence
      Judgments are made by those with authority and experience and subject to
       appropriate levels of internal review

Presentation and Disclosure
      Footnote and other disclosures are consistent with underlying data and judgments
      Liabilities are appropriately classified
      Events are identified which are reasonably possible of occurring and which could
       result in a significant change in unrecognized tax benefits within 12 months
                              FIN 48 Implementation
Getting the Numbers Right and Keeping the Numbers Right

                                                            Tax Controls,
             Tax Accounting                             Processes, and Risks

  FIN 48                                                 FIN 48
  “Getting the Numbers Right”                            “Keeping the Numbers Right”
  One-time Cumulative Effect Adjustment                  Maintain and Support

  Ongoing application of FIN 48                          Tools and Technology

  Distinguish between “Highly Certain” and Uncertain     Process
  Tax Positions                                          Control Assertions:
  Inventory and Evaluation of Uncertain Tax Positions           ·   Completeness
  Recognition and Measurement                                   ·   Existence
  Interest and Penalties                                        ·   Valuation and Measurement
  Classification                                                ·   Presentation and Disclosure
  Disclosures