FIN 48: The Basic Accounting and Auditing Implications
by
Member of the Firm
Does the mere mention of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, conjure up speculation of another accounting and auditing nightmare? Well, it doesn’t need to. Read on to get the answers to some basic questions regarding FIN 48. What does this entail? How difficult is it to implement? Whom does it apply to? When is it effective? Why was it needed? Better yet, is it going to increase the time required for my CPA to provide needed accounting, auditing and tax services? This article will attempt to answer these questions and more in a plain, easy to understand fashion.
What Is It And Why Was It Needed?
FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income Taxes. It was issued by the Financial Accounting Standards Board in 2006 to help organizations understand how they should account for uncertainties in recognizing income tax on financial statements. FASB took this action to correct ambiguities caused by the fact that there was no specific guidance on this issue in its previous Statement No. 109.
Whom Does It Apply To And When?
FIN 48 applies to both publicly- and privately-held companies and non-profit organizations. Yes, non-profit organizations may be affected if they earn unrelated business income (UBI). For publicly-held companies it became effective for fiscal years beginning after December 15, 2006. For privately-held companies, except ones that are consolidated with public companies that apply U.S. GAAP, and non-profit organizations, it is effective for fiscal years beginning after December 31, 2007. Fortunately, the FASB is currently considering delaying the effective date until periods beginning after December 15, 2008. (Watch for an update once FASB makes a final determination as to the effective date.)
What Are The Requirements of FIN 48?
FIN 48 requires entities subject to income tax to apply a two-step process to uncertain tax positions – recognition and measurement. The first step, recognition, requires the entity to determine whether is it “more likely than not” that a tax position will be sustained upon examination by the taxing authorities. The entity needs to be more than 50% certain the position would be upheld assuming the taxing authority has full knowledge of all relevant facts. The second step, measurement, requires the entity to determine the largest amount of tax benefit that is more than 50% likely of being realized upon ultimate settlement. This is the amount of benefit that will be recognized in the financial statements.
What Is A Tax Position?
A tax position refers to a position taken in previously filed tax returns or a position expected to be taken in a future tax return that affects the recording of current income tax expense, income taxes payable, deferred income tax assets or deferred income tax liabilities. A tax position can affect whether or not a tax return is filed, shifting of income between tax jurisdictions or even tax periods, characterization of income, classification of income as taxable versus tax exempt or any other number of items related to how income and expenses are treated in a tax return.
How Will It Impact My Audit?
Each tax position will need to be identified, assessed, and documented by management. The auditors will need to identify and evaluate each tax position with possible FIN 48 implications in order to address recognition and measurement criteria and comply with generally accepted auditing standards. This will require more coordination between the auditors and tax experts and a closer evaluation of the tax returns and tax accruals during the audit process. Hence, the time to complete the audit procedures designed to test income taxes will likely take longer than in years past. Ultimately, any potential adjustments will need to be evaluated for materiality and discussed with management.
How Will This Impact My Financial Statements?
For all financial statements prepared in accordance with generally accepted accounting principles, the amount of current taxes and deferred taxes may be impacted should an adjustment be required to comply with FIN 48. In addition, interest and penalties may need to be accrued. Each company is required to disclose its policy on classification of interest and penalties in the footnotes to the financial statements. In addition, the company must include:
In summary, much judgment will go into the process of implementation of the interpretation due to its complexity. So start preparing now for the implementation of FIN 48. Begin documenting your tax positions, past and present, and evaluating them in light of the recognition and measurement criteria. And remember, this is an ongoing issue and each tax position will need to be analyzed annually.