Understanding the mechanics of FASB ASC Subtopic 740-10.

• Author: Swenson, Michael C.
• Position: Financial Accounting Standards Board accounting standards codification on accounting for uncertainty in income taxes

FASB Accounting Standards Codification (ASC) Subtopic 740-10 (which incorporates most of former FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes), requires that each tax position meet a more-likely-than-not (MLTN) test and that the tax benefits be correspondingly reduced if the result is not certain. In essence, the reporting requirements provide a glimpse into how much tax risk a company is prepared to take.

Subtopic 740-10 applies to GAAP-basis financial statements, be they audited, reviewed, or compiled financial statements. Accordingly, Subtopic 740-10 will not apply to cash-basis financial statements or to any other non-GAAP-basis statements. Subtopic 740-10 deals with all income tax positions; by definition, it does not apply to sales, use, property, intangible, or value-added taxes. It applies to any income tax in any jurisdiction, whether it is federal, state, local, or foreign income tax, and it applies to any entity that might be subject to income tax.

Subtopic 740-10 offers a seemingly simple process:

* Inventory all tax positions for all open years, including the current year, for all jurisdictions;

* Classify all tax positions as uncertain or routine business transactions meeting the MLTN standard; and

* Determine whether the tax benefits from uncertain tax positions (and how much of those benefits) should be reported in the financial statements.

Observation: Clients should continue to assess the impact of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, and any related regulations on their material tax positions and apply the process outlined above to document and assess any new uncertain tax positions.

While labeled a "simple process," the client must exercise a great deal of judgment in reaching conclusions in each of these areas. Also, since Subtopic 740-10 requires a review of all open years for all jurisdictions, clients must reassess and quantify the consequences of decisions not to file returns or to take aggressive positions made years ago. Although Subtopic 740-10 does not specifically address the issue, it seems logical to conclude that a decision involving an uncertain tax position that potentially omitted more than 25% of gross income would require the application of the six-year statute of limitation rather than the typical three-year statute of limitation. Additionally, it also is logical to conclude that there may be an indefinite deferral of any tax benefits, plus penalty and interest issues, if required tax returns are not filed.

The administrative issues and problems created by this requirement can be significant. Subtopic 740-10 provides no safe harbor to deal with these issues, other than the ability to disregard "immaterial"...