Is your company ready for the FIN 48 challenge?

• Author: Heffes, Ellen M.
• Position: FinancialREPORTING - Financial Accounting Interpretation Number 48

Financial Accounting Interpretation Number 48, known as "FIN 48," is the latest rule from FASB regarding accounting for uncertainty in income tax positions. It is effective for fiscal years beginning after Dec. 15, 2006, and affects public and private companies and companies that are for-profit or not-for-profit.

As a result, companies are charged with addressing new questions: What are their uncertain tax positions? What is the unit of account at which the recognition and measurement criteria apply? How much of a tax benefit can be recognized under the required criteria? How will they classify interest and penalties? How will the users of the financial statements--banks, private equity firms, investment bankers, potential acquirers of the business, other investors and the government--interpret the new required disclosure of uncertain tax positions in financial statements?

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For public companies, FIN 48 requires a great sense of urgency, as the potential effect of adoption must be disclosed on the remaining financial statements for 2006. Additionally, the actual effect of the adoption of FIN 48 must be reflected in the financial statements for the first quarter of 2007, with all 2007 financial statements prepared in compliance with FIN 48.

Privately owned enterprises will also need to address FIN 48 as part of their annual financial statements for the fiscal year beginning after Dec. 15, 2006. If interim financial statements are issued, then they will need to address it for all such statements issued for 2007.

To start the process, companies will need to inventory all of their uncertain tax positions. Some examples include the following: decisions to file or not file income tax returns in taxing jurisdictions (international, U.S. federal, state and local); decisions surrounding how and when companies report their income and expenses; decisions about income tax credits claimed; decisions to write...