Private lessons: public company experiences with FIN 48 provide map for private companies.

• Author: DeTrane, Joseph S.

With their public company colleagues having already danced with FIN 48, it's time for private companies to consider addressing the rules for the first time. Though FASB's Nov. 7 proposal to defer FIN 48's application for one year, until periods beginning after Dec. 15, 2007, may give private companies more time to comply, it's still worth looking at experiences public companies had and getting a jump on the process. At press time, FASB was developing a staff position on the delay, which would be subject to a 30-day comment period.

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Public companies first addressed the impact of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, in their SEC filings for the quarter ending March 31, 2007. FIN 48 was effective for financial statements issued for fiscal years beginning after Dec. 15, 2006.

Implementing FIN 48 presents private companies with some unique challenges that public companies don't usually face:

* Private companies are generally smaller and, consequently, often lack internal tax personnel.

* They are not subject to the Sarbanes-Oxley Act and may not have developed good internal tax controls.

* They may have little or no audit history with taxing authorities because of their smaller size.

* Their shareholders can be more focused on tax savings than public company shareholders and may take more aggressive tax positions.

Still, despite the differences, there are many lessons to be learned from the experience public companies have had with applying the new rules.

LESSONS LEARNED

Start the FIN 48 process soon. Private companies don't know how long it will take to complete the FIN 48 review until it's done. Depending on the complexity of the company, it could be a two-to six-month process. Also, it's important to get it right the first time, as a change could result in a restatement of the financial statements if an error is discovered later.

Develop an inventory of federal, state or international tax positions taken. The positions should include decisions regarding whether to file a tax return in a specific jurisdiction. Positions include those that are the same as financial book treatment, as well as those that are treated differently.

Determine the level of materiality. FIN 48 encompasses a review of tax positions that are material to the financial statements.

Determine the open tax years. Tax years can be open under the statute of limitations for a period longer than the typical three-year federal statute or, in some cases, longer than the four-year statute of some states. For example, the statute for the decision to not file in certain jurisdictions may be open forever. Also, in situations of net operating loss and credit carryovers, the statute is open for the tax years that generated the carryover until the statute closes for the year that the loss or credit was utilized.

Recognize that the "more likely than not standard" under FIN 48 is different than the standard used for tax returns filed in prior years...