Fall advocacy review.

• Position: Tax Executives Institute

August and September saw a number of follow-up submissions relating to ongoing Institute advocacy projects," TEI President David M. Penney observed. "In addition to testifying before the Canadian House of Commons Standing Committee on Finance about the Institute's earlier Pre-Budget Consultation written submission," he said, "we pressed U.S. Treasury and IRS officials about the need for administrable exceptions to FATCA's reporting and withholding requirements. We also released a refreshed and updated policy statement opposing the States' use of contingent fee auditors, and drilled down on Canadian draft legislation limiting the deferral of partnership income by corporate partners."

He added that the Institute's new projects--on the treatment of health care benefits for adult children in Wisconsin and the Financial Accounting Foundation's (FAF's) post-implementation review of FIN 48--have antecedents in TEI's prior advocacy work. Specifically, the Wisconsin project relates to the tax-related portion of healthcare reform, and the Institute's comments on the FAF's project builds upon TEI's substantial body of work relating to FIN 48, Schedule M-3, Schedule UTP, IFRS, and other projects at the intersection of tax and financial reporting.

A separate story on Mr. Penney's testimony before the House of Commons appears at page 312 of this issue.

Post-Implementation Review of FIN 48

In a September 30 letter to the Financial Accounting Foundation, Institute President David M. Penney commended the FAF for conducting a post-implementation review process for accounting standard pronouncements. "The data will provide a useful filter through which the FAF and the FASB can evaluate what worked -and what did not--by comparing expected outcomes of the guidance with actual results," Mr. Penney said. The first pronouncement reviewed by the FAF is FASB Interpretation No. 48 (FIN 48) on Accounting for Uncertainty in Income Taxes, which modified Financial Accounting Statement No. 5 (FAS 5) governing contingent liabilities. The letter observed that FIN 48 "has resulted not only in significant implementation and interpretation challenges, but also engendered ancillary developments and burdens for financial statement issuers, taxpayers, and government regulators."

After surveying the high-level differences between FAS 5 and FIN 48, TEI said that "the best measure of the reliability and accuracy of tax reserves is a comparison of the predicted liability for uncertain tax positions to the actual outcome on settlement after examination by the taxing authority." Under this measure, the Institute concluded, "FIN 48 seems less accurate than FAS 5."

In reaching this judgment, TEI identified factors contributing to the accrual of excess reserves, including the cliff effect of the more likely-than-not (MLTN) standard for recognition of tax benefits and the proscription against taking account of issue trading in setting tax reserves. In addition, the requirement that a company reassess the merits of each income tax position on a MLTN basis every quarter leads to substantially more volatility in reported tax liabilities, the...