The good news is that on Oct. 15, 2008, FASB deferred the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), for all nonpublic companies for one year. The bad news is that the year is up already. Company and outside tax and financial accountants should already be heavily involved in their FIN 48 analysis.
The effective date was deferred until fiscal years beginning after Dec. 15, 2008 (that is, until 2009 for calendar-year companies). However, that means that during this month, calendar-year private companies should complete a FIN 48 analysis of their year-beginning tax positions so they can record the adjustment for the change in accounting method at the end of 2009. This analysis could be “backed into” later in the year, but as time passes it will be more difficult to recall all tax positions (not just those that are unlikely) for all types of taxes for all open years in all jurisdictions and what the level of certainty and values were under the law at the beginning of the year. So if a company has not already done this analysis and wants to report in accordance with U.S. GAAP, the earlier it starts, the better.
FASB EFFECTIVE DATE EXTENSIONS
FIN 48 was originally supposed to go into effect for years beginning after Dec. 15, 2006, but FASB recognized the difficulty of nonpublic company compliance and put off the effective date for one year. In February 2007, the Private Company Financial Reporting Committee (PCFRC) raised issues about FIN 48’s effective date for private companies. This group of financial statement users, preparers and CPA practitioners evaluates the costs and benefits of the required procedures and advises FASB on how the day-to-day technical activities of private companies are affected by FASB standards.
The PCFRC’s concerns were that many nonpublic entities and their CPA practitioners were not fully aware of FIN 48’s implications and had not had the necessary time to understand and apply FIN 48 before its effective date. The PCFRC also believed that some pass-through entities did not understand that the interpretation applied to them.
These concerns continued into 2008, and on Oct. 1, 2008, FASB extended the deferral of the application of FIN 48 for private company pass-throughs, including nonpublic not-for-profit organizations, until years beginning after Dec. 15, 2008. On Oct. 15, FASB expanded the scope of its deferral to include all private companies, in part because of problems identified by its staff in having varying effective dates for tiered structures that included pass-throughs, but also because many private companies were still not ready to implement the interpretation.
At its Dec. 17, 2008, meeting, FASB said that private companies that elected to defer the application of FIN 48 until after Dec. 15, 2008, should explicitly disclose that election. Such companies must also disclose their accounting policy for evaluating uncertain tax positions in each set of financial statements to which the deferral applies.
At its Oct. 15 meeting, FASB questioned the efforts of financial statement preparers and their CPA practitioners to learn the interpretation and the efforts of those who provide professional training and education, including the AICPA, to assist them. In this regard, in November 2006, the AICPA produced the free Practice Guide on Accounting for Uncertain Tax Positions Under FIN 48, which has been downloaded by more than 40,000 members. The AICPA offers a self-study or group-study CPE course on FIN 48 and has modified its course on FASB Statement no. 109, Accounting for Income Taxes, to include FIN 48 considerations. FIN 48 has been covered in numerous national conferences and state society programs. On the other hand, however, some practitioners have complained about late and inadequate guidance from FASB.
The deferrals given so far have encouraged some to expect more deferrals or possibly an exemption for private companies. However, FASB is in a difficult spot and seemed frustrated at its Oct. 15 meeting at the lack of efforts to implement its interpretation. A further deferral seems unlikely because it would undermine FASB’s standard-setting authority for private companies.
Some businesses have resisted adopting FIN 48 for reasons other than not understanding the interpretation. The analysis is complex and burdensome and may require outside assistance to properly evaluate positions. Some are also concerned that FIN 48’s disclosure requirements could trigger an IRS audit. The IRS has been training agents in the use of FIN 48 but recently stated that the disclosures were too “broad” to be “really meaningful” to agents.
A few taxpayers and their advisers seem to be holding out for a new rule as convergence toward international accounting standards progresses. However, IFRS for most private companies is still several years off, and, in any case, IFRS rules may require even more analysis than the U.S. GAAP FIN 48 rules.
SOME DISCLOSURE EXEMPTIONS
At its Oct. 1 meeting, FASB decided to exempt private companies from the disclosure requirements in paragraphs 21(a) and (b) of FIN 48. Paragraph 21(a) requires a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period. Paragraph 21(b) requires disclosure of the total amount of unrecognized tax benefits that, if recognized, would affect the company’s effective tax rate.
While these disclosure exemptions reduce some of the FIN 48 burden, significant and controversial disclosure requirements remain. Paragraph 21(d) still includes the “audit me” requirement to disclose the total amounts of unrecognized tax benefits that could reasonably be expected to significantly increase or decrease within 12 months of the reporting date, such as the pending expiration of the period of assessments for a controversial tax position. This disclosure must include the nature of the uncertainty, the nature of the event that could cause the change, and an estimate of the change. Paragraph 21(e) requires a description of tax years that remain open to examination.
WHAT TO DO NOW
Assuming that a company wants to report in accordance with U.S. GAAP, it is time to get to work. If a company is still not familiar with FIN 48, AICPA courses and a free practice guide are available at www.aicpa.org, and the interpretation and guidance are available directly from FASB at www.fasb.org. A company’s CPA practitioner can also help it understand and develop a work program to comply.
A CPA who provides audit and tax services to a client must carefully navigate independence issues when assisting the client with a FIN 48 analysis. The CPA and client should consider meeting to be sure that the company understands and is in a position to take responsibility for the FIN 48 analysis, as it does for other complex areas of the financial statements. While the potential attest risk attributable to FIN 48 may be minimal, the consequences of a lack of independence can be fatal for the CPA firm.
To ensure that a CPA who performs both attest and tax services for clients and also performs or assists in FIN 48 determinations preserves independence, a client without sufficient knowledge or understanding of the FIN 48 recognition and measurement processes may wish to retain a tax professional as a consultant to oversee the CPA’s FIN 48 services.
Companies need to identify and evaluate tax positions at the start of 2009 so they can report the effect of the change in accounting method at the end of the year. If a company has not already done this, it needs to do so as soon as possible. Companies need to take an inventory of all material tax positions for all types of taxes in all jurisdictions and for all open years. This may include unreported tax positions, such as a decision not to file a return in a state where nexus is in doubt.
The determination of what constitutes an individual tax position (the unit of account) may directly affect the assessment of the uncertain tax position and is a matter of professional judgment. In making that determination, the financial statement preparer should consider:
Once this inventory is completed, the positions need to be evaluated in terms of their likelihood to succeed. For positions that are not more likely than not (MLTN) to succeed, no tax benefit should be considered. For those that are, only the amount that has a greater-than-50% chance of being sustained on audit by a knowledgeable agent can be included in valuing the benefit. This analysis is done using all relevant authorities. Details of how to make the MLTN determination and how to value those that are more likely than not to succeed are included in FIN 48 and the AICPA practice guide.
At year-end, the company will do the same analysis and report any change as it changes its method of accounting. After that, the process should become fairly automatic, with new positions being identified and valued in accordance with FIN 48. A side benefit of the FIN 48 analysis is that it will be helpful to companies in raising issues and managing their taxes. It is important to start now, because backfilling the analysis of the starting position is much more difficult toward the end.
If a company decides not to adopt FIN 48, this would be a GAAP exception with all its implications, but this may be the fallback position for those that are either unprepared or unwilling to disclose uncertain tax positions. This would be a major decision for a company and should be considered carefully with the CPA practitioner, owners and lenders.
(For more on FIN 48’s requirements, see “FIN 48 Compliance: Disclosing Tax Positions in an Age of Uncertainty,” The Tax Adviser, Jan. 08, page 24.)
—William R. Stromsem, J.D., CPA, is communications director in the AICPA’s Tax Division, an associate professor of accountancy at George Washington University, and a member of the board of Community Tax Aid in Washington, D.C. His e-mail address is email@example.com.
This article appears in the February 2009 issue of The Tax Adviser, the AICPA's monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price. Call 1-800-513-3037 or e-mail firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.