What you need to know about FIN 48?

AuthorDunbar, Amy E.

The July 2006 release of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, (http://www.fasb.org/pdf/fin%2048.pdf) represents perhaps the most significant update to the financial reporting of income taxes in nearly 15 years.

Many companies are finding that compliance with the new interpretation requires substantial changes in their practices of recognition and measurement of uncertain tax positions. FIN 48 also includes controversial new disclosure guidelines that many observers contend will provide a "roadmap" to the IRS for conducting their audits. The major provisions of FIN 48 all require substantial judgment in practice.

FIN 48 affects all companies preparing financial statements in accordance with GAAP and is effective for fiscal years beginning after Dec. 15, 2006. Calendar-year public companies will be the first required to adopt FIN 48, reporting the impact on the first quarterly statements issued in 2007.

The FASB's stated goal with FIN 48 was to reduce diversity in practice, and to that end it prescribes a specific model for recognizing and measuring uncertain tax positions. This model requires a gain-contingency approach, rather than the loss-contingency approach many firms have been using. In essence, under loss-contingency rules, the company treated any uncertain tax benefit as belonging to the company. Under FIN 48's gain-contingency perspective, the uncertain tax benefit belongs to the government and the company must apply a two-step process to determine the tax benefit record.

In the first step, the company must determine whether it is more likely than not that the position would be sustained upon audit. More likely than not is defined as "a likelihood of more than 50%" and only the technical merits of the position are to be considered. In applying this threshold, the company should assume the position will be audited. If the position does not meet the threshold, then no tax benefit should be recognized. If the position does meet the threshold, the second step determines measurement.

In the second step, the tax benefit is measured as the largest amount of benefit that is cumulatively greater than 50% likely to be realized. As an example of this requirement, suppose that XYZ Co. takes a position that leads to an uncertain tax benefit and they assess the possible eventual outcomes as follows:

Allowable Amount Cumulative of Deduction Probability Probability $500 10% 10% $400 30% 40% $300 25% 65%...

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