Uncertain positions: FIN 48, accounting for uncertainty in income taxes.

• Author: Davis, Conrad
• Position: Corporatetax

The Financial Accounting Standards Board recently released FASB Interpretation 48 (FIN 48), which provides guidance on FASB Statement 109 (FAS 109) and describes the standard for recognizing and measuring the benefit or liability from tax positions reflected in financial statements.

In general, the attributes of a tax position are recognized only if the position is more likely than not to be sustained upon examination, including the appeal process and litigation. When evaluating this threshold, CPAs should consider that the position will be examined by the appropriate taxing authority with knowledge of all relevant information.

The next step is to measure the amount of the tax attribute to report on the financial statement. The amount reported is the largest benefit that is more likely than not to be sustained upon examination. The difference between what is reported on the financial statement and the tax returns will either reduce the deferred tax asset or refund, or increase the deferred tax liability.

If a tax position subsequently meets the more-likely-than-not requirement, then it should be recognized in the next financial reporting period. Conversely, tax positions that no longer meet the more-likely-than-not requirement should be derecognized in the next financial reporting period.

FIN 48 states that use of a valuation allowance is not an appropriate substitute for derecognizing the tax position.

Purpose

Where FAS 109 provided for the financial statement recognition of tax attributes, FIN 48 provides specific guidance addressing accounting for the uncertainty of tax positions.

Recognizing the tax law's complexity and perceived inconsistency regarding when to recognize, derecognize and measure tax attributes, FASB issued FIN 48 to promote greater consistency of and comparability in reporting income tax assets and liabilities.

More-Likely-Than-Not Criteria

In FIN 48, a tax position is recognized in financial statement reporting when it is more likely than not based on its technical merits, and that the position would be sustained upon examination.

In evaluating this requirement, there is no allowance for likelihood of detection. Since it's presumed that the position will be evaluated by a taxing authority, the technical merits of a tax position are to be evaluated on tax law, including legislative intent, regulations, rulings and case law.

In addition, when the past administrative practices and precedents of the taxing authority in its...