Independence: CPAs, firms must carefully consider how to manage FIN 48 compliance.

• Author: Dellinger, Kip
• Position: FASBNEWS

Issued by the Financial Accounting Standards Board, FIN 48--Accounting for Uncertainty in Income Taxes adds significant financial statement reporting and disclosure requirements for income tax liabilities under generally accepted accounting principles. The rules involve complex analysis of income tax positions of a financial statement issuer.

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Many CPA firms serve as both the tax adviser to (and preparer of) a client's tax returns and also as the reviewer or auditor of the client's financial statements. This dual relationship presents, in all likelihood, a serious independence problem that CPA firms will need to resolve.

WHAT IS FIN 48?

FASB issued FIN 48 in July 2006, and it is effective for fiscal reporting periods beginning after Dec. 15, 2006. In the initial year of implementation, all existing tax positions (and potential positions, such as non-filed returns) open under the statute of limitations must be addressed.

FIN 48 applies only to business entities subject to income taxes, as well as unrelated business income taxes of not-for-profit entities, S corporations that converted from C corporation status within 10 years and includes special taxpaying entities, such as real estate investment trusts, real estate mortgage investment conduits and regulated investment companies.

Also, if an entity subject to income tax owns a material interest in a partnership or similar entity, the tax positions of the partnership or other entity may need to be identified, measured and evaluated.

In the initial year of implementation, the determination of uncertain tax positions and their resolution will be required for all tax return years open under the statute of limitations. This includes evaluating the likelihood of tax jurisdictions asserting that the client should file income tax returns with their tax authority.

The purpose of FIN 48 is to clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes."

The Interpretation presents a recognition threshold and measurement concept for financial statement recognition and measurement of a tax position taken (including prospectively) in a return. It provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition, and it applies to each tax jurisdiction for which a business entity may have income tax...