FAF releases "post-implementation review" of FIN 48

BY KEN TYSIAC
January 12, 2012

The Financial Accounting Foundation’s first formal “post-implementation review” of a FASB standard is complete with this morning’s report that FASB Interpretation no. (FIN) 48, Accounting for Uncertainty in Income Taxes, generally achieves its purpose.

According to a FAF announcement, the review concluded that FIN 48 increases relevance and comparability in reporting information about income tax uncertainties.

The review also found that some stakeholders believe the standard could be improved. The complete report is available at www.accountingfoundation.org.

FASB Chairman Leslie Seidman said in a statement that FASB members will provide a written response to the report in the coming weeks.

“Post-implementation review is an important feedback loop in the standard-setting process,” Seidman said in the statement. “I believe that the report on FIN 48 affirms the overall effectiveness of the reporting requirements and the FASB’s processes, while identifying suggestions for improvement.”

FIN 48 is codified in Accounting Standards Codification Topic 740, Income Taxes.

An independent FAF team working under the oversight of the FAF board of trustees undertook the review, which is the first of its kind.

The post-implementation review process is designed to be independent of the standard-setting processes of FASB and the GASB and was created to provide real world feedback and analysis of standards. The FAF review staff reports to the trustees and FAF president but draws members from FASB and GASB staff.

Investors and other financial statement users, preparers, accounting practitioners, academics and financial regulators provided input for the review team.

The review concluded that:

  • More information has been reported about uncertain income tax positions than in the past as a result of FIN 48.
  • Investors generally are using the improved information to guide their decisions.
  • Preparers are accounting for and reporting income tax uncertainties more consistently and with more relevant information than they had been before FIN 48.
  • The benefits of FIN 48 to investors outweigh its costs.


The report does say, though, that preparers are concerned that the judgments involved in accounting for income tax uncertainties result in information that is not comparable and may not represent amounts expected to be paid. Preparers said applying FIN 48’s provisions to complex and often vague tax codes and practices creates difficulties. Some preparers, particularly from smaller organizations, reported incurring significant costs such as additional audit fees, external legal and accounting advice, and documenting existing tax positions.

The review team’s research indicated that “preparers and practitioners generally do not believe that FIN 48 resolves the issues underlying the need for the standard. Therefore, generally, they do not believe the costs of applying FIN 48 are reasonable compared to its benefits.” A number of practitioners, however, believe that the standard resolved some of the underlying issues. “Practitioners with this view cite the benefits of increased consistency in assessing income tax uncertainties and increased comparability,” the report states.

The review team recommended that FASB continue to seek user input during the agenda and early deliberation phases of standard setting, and include thorough discussion about the need for new financial reporting in each standard. Each standard also should include a thorough discussion of benefits and costs, according to the review team.

FIN 48, issued in June 2006, has been at the forefront of the ongoing debate over private company financial reporting. The Private Company Financial Reporting Committee (PCFRC) in September 2007 recommended that FASB defer FIN 48’s effective date for nonpublic entities until its implications for pass-through entities were clarified. The PCFRC was formed by the AICPA and FASB to give private companies more input in the standard-setting process.

FASB deferred FIN 48 for nonpublic entities, making it effective for financial statements beginning after Dec. 15, 2008, two years after the initial effective date. But the PCFRC’s May 2008 recommendation that FASB exempt private companies from FIN 48 was denied by FASB.

The board declined to exempt private companies and nonprofits from FIN 48, but modified the disclosure requirements for nonpublic entities. Accounting Standards Update (ASU) 2009-06 provided guidance and eliminated certain disclosures for nonpublic entities relating to unrecognized tax benefits.

Saturday is the Financial Accounting Foundation’s deadline for comment letters on private company financial reporting. A blue ribbon panel sponsored by the AICPA, the FAF and the National Association of State Boards of Accountancy had recommended the creation of an independent board to modify U.S. GAAP for private companies.

Instead, the FAF has proposed creating a Private Company Standards Improvement Council (PCSIC) whose recommendations on whether exceptions to U.S. GAAP are necessary for private companies would be subject to approval by FASB. The AICPA is adamantly opposed to this plan and has advocated for an independent board to determine when FASB standards need to be changed for private companies.

The AICPA has set up a web-based application to help interested parties send comment letters to the FAF on the issue.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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