Post-implementation review of FIN 48.

September 30, 2011

On September 30, 2011, Tax Executives Institute filed the following comments with the Financial Accounting Foundation in connection with the FAF's post-implementation review of FASB Interpretation No. 48. The comments, which took the form of a letter from TEI President David M. Penney to Theresa S. Polley, President and Chief Executive Officer of the Financial Accounting Foundation, were prepared under the aegis of TEI's Financial Reporting Committee, whose chair is Donald J. Rath of Synopsys, Inc. Contributing substantially to the development of TEI's comments were: Janice Lucchesi of Akzo Nobel Inc.; James C. Parent of Tyco International; Audrey Sherman of Allergan, Inc.; and Tavin Skoff of SAIC. Also contributing were Robert L. Howren of BlueLinx Corporation; Jocelyn Krabbenschmidt of Amazon.com; and Gary J. Wenzel. Jeffery P. Rasmussen, TEI Senior Tax Counsel, coordinated the preparation of the comments.

The Financial Accounting Foundation has established a post-implementation process to review the guidance issued by the Financial Accounting Standards Board. The inaugural project is a review of FASB Interpretation No. 48 (FIN 48) on Accounting for Uncertainty in Income Taxes, which is now incorporated in Accounting Standards Codification (ASC) 740-10. On behalf of Tax Executives Institute, I am pleased to submit the following comments for your consideration.

TEI Background

Tax Executives Institute is the preeminent global association of corporate tax executives. Our nearly 7,000 members are accountants, attorneys, and other business professionals employed by approximately 3,000 of the leading companies in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to the development and implementation of sound tax policy and to promoting the uniform and equitable enforcement of the tax laws. The Institute is proud of its record of working with congressional committees, government agencies, and other policy-making bodies (including the Public Company Accounting Oversight Board and the Securities and Exchange Commission) to minimize the cost and burden of tax administration and compliance to the mutual benefit of the government, business, and ultimately the public. We also support efforts to ensure that companies fairly present their financial position in financial statements prepared for investors and in documents filed with the SEC.

TEI members are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Thus, members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on a daily basis. Most of the companies represented by our members issue financial statements that are governed by the FASB's pronouncements and, of those, most are SEC registrants. For companies governed by other accounting standards, such as International Fiscal Reporting Standards (IFRS), the FASB's work is also critical since FASB pronouncements are often referenced by other accounting standards boards. In addition, they are subject to scrutiny by the IRS and various other agencies in the United States and foreign jurisdictions on a continual basis.

As a professional association of in-house tax executives, TEI offers a different perspective on the issues from other organizations. TEI's members work directly for corporations that routinely enter into business transactions requiring an analysis of their tax benefits and burdens. These companies have professional staffs dedicated to ensuring compliance with the tax law while minimizing their tax liability. TEI members and their staffs are also responsible for ensuring the quality, reliability, and documentation of their companies' internal controls for the proper financial accounting and reporting of tax expense, tax assets, and tax liabilities under section 404 of the Sarbanes-Oxley Act of 2002 (SOX).

Hence, we believe that the diversity, background, and professional training of TEI's members place us in a uniquely qualified position from which to comment on the implementation of FIN 48. Along with the government and the investing public, our members have the most at stake in trying to craft a financial reporting system that fairly presents the results of company operations and is as administrable and efficient as possible. We are pleased to submit the following comments.

General

Tax Executives Institute commends the Financial Accounting Foundation for instituting a post-implementation review (PIR) process. We believe that financial accounting guidance will be improved by systematically collecting feedback on the benefits, challenges, and burdens of implementing the accounting pronouncements issued by the Financial Accounting Standards Board. The data will provide a useful filter through which the FAF and FASB can evaluate what worked--and what did not--by comparing expected outcomes of the guidance with actual results. Finally, we also commend the FAF for selecting FIN 48 for its initial project. The guidance 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. TEI appreciates the opportunity to provide its input on the FAF's PIR for FIN 48.

Purpose of FIN 48

FIN 48 altered the financial statement treatment of accounting for uncertain income tax positions by shifting the focus from the contingent liability approach of FAS 5 to a modified gain contingency approach. Thus, under FAS 5 companies reported their income tax liabilities on the basis of their tax returns "as filed" so long as they and their auditors were satisfied that additional tax liabilities were not "probable." If a loss contingency from an assessment by the tax authorities was "probable" and the amount could be reasonably estimated, a liability for the assessment was accrued. (1) In contrast, FIN 48 treats each tax position as though it might create a tax asset rather than a liability. If a tax position will more likely than not (MLTN) be sustained, the amount of tax benefit related to the position is recognized and then measured as the largest amount of benefit that has a cumulative probability greater than 50 percent likely to be realized, considering the various amounts and outcomes that could be realized. When more than two outcomes may resolve an uncertain tax position (i.e., resolution may occur other than on an "all-or-nothing" basis), each potential outcome is assigned a probability to determine the greatest amount of tax benefit that has a greater than 50 percent cumulative probability of being realized. The measurement process is often referred to as the cumulative probability weighting approach. (2)

Upon implementation, financial statement issuers were required to analyze and inventory every material tax position-whether claimed or unclaimed--in every tax jurisdiction and for every year where the statute of limitations was open in order to document the company's tax positions at the effective date. Moreover, FIN 48 imposes a continuing obligation upon the issuer to review its inventory of tax positions in all open tax years and to recognize and de-recognize tax positions as the underlying facts, or the law applicable to those positions, evolve. Under the FAS 5 loss contingency approach, only a truly significant development or series of events would alter a prior "probable" conclusion requiring a change in the contingent liability.

In applying the MLTN recognition standard to a tax position: (i) it is presumed that the tax authority will examine the tax position and have full knowledge of all relevant facts; (ii) the technical merits of a tax position derive from sources of authority in the tax law and their applicability to the facts and circumstances; and (iii) each tax position must be evaluated without consideration of the possibility of offset. In other words, financial statement issuers cannot base their recognition or measurement on the risk of audit detection, must assume that the facts and legal rationale for each position will be scrutinized by the tax authority with the same level of knowledge and understanding of the facts and law as the issuer, and may not...