FIN 48 – Uncertainty in Income Taxes: A Must Know for Tax CPAs & Accountants/Auditors!

Ideal for self-study or on-site training!

FIN 48 adds major new tax documentation and disclosure requirements on a scale unseen since passage of the Sarbanes-Oxley Act in 2002. Due to an outpouring of requests for an extension, the Financial Accounting Standards Board has proposed to defer the effective date of Interpretation 48 for nonpublic entities to fiscal years beginning after December 15, 2007. Thus, starting in early 2007 for public companies (and 2008 for nonpublic companies), FIN 48 significantly modifies the accounting and disclosures relating to uncertainties in income taxes covered by FAS 109, Accounting for Income Taxes. Unlike previous FASB requirements, this Interpretation will likely now require an unprecedented involvement of tax professionals in calculating, recording and/or reviewing tax provisions.

FASB prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance is provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. These concepts are reinforced with real-world case studies and examples throughout the course.

Objectives

• Define what constitutes a tax position
• Determine the appropriate unit of account for individual tax positions
• Apply the more-likely-than-not recognition threshold
• Measure the largest amount of tax benefit available under FIN 48
• Decide what constitutes an ultimate settlement with tax authorities
• Apply tax-planning strategies

Prerequisite: Knowledge of FAS 109, Accounting for Income Taxes

View the video clip

In this video, Bobby J. Carmichael, Ed.D., CPA, Professor of Accounting at Texas A&M University – Commerce discusses FIN 48 with Scott F. Guertin, CPA, Tax Partner and National Leader, Income Tax Accounting Services, at BDO Seidman LLP in Boston, MA, and SFAS No. 109 with William I. Eskin, CPA, President of WIE, Inc. in Baltimore, MD, and an instructor for this course; Scott F. Guertin, CPA; and Linda A. Paradis, CPA, Manager in the Tax Department of RubinBrown LLP in St. Louis, MO.

Note: Accounting for Income Taxes - Applying SFAS No. 109/FIN 48: A Whole New Ballgame! includes the text and video contents of this course.

*(65-min. video) The DVD disk contains the video presentation and a viewable copy of the Manual.
**The Additional Manual is for group study training only. Unlike other formats, it has no exam answer sheet and cannot be used to earn self-study credit.

Chapter 1

Theoretical Concepts of SFAS No. 109

Learning Objectives

• Understand the scope, objectives, and basic principles of SFAS No. 109.
• Review recognition and measurement of deferred taxes under SFAS No. 109 and FIN 48.
• Be aware of sources of future taxable income for recognition of a deferred tax asset.
• Be aware of tax-planning strategies.
• Review provisions of SFAS No. 109 – Summary Chart.

Overview

In today’s reporting environment, it is important for the professional accountant to accurately and efficiently report the results of a company’s operation. A practical application worksheet approach is utilized that will aid in this process. There is no other area in accounting that is as far reaching, and requires knowledge of as vast a number of topics in financial and tax accounting, as accounting for deferred taxes. This course, SFAS No. 109 – Accounting for Deferred Income Taxes, addresses the application of this complex standard to many common differences between financial accounting and tax compliance.

The Sarbanes-Oxley Act requires senior executives to attest to the extent and effectiveness of internal controls for financial reporting. The controls surrounding the tax function are a critical component of this compliance. Controls should be in place to provide timely and accurate information for all required data that is the basis for properly measuring a firm’s deferred tax asset or liability and properly reporting this information in the financial statements.

A lack of controls surrounding the tax function and specifically the tax provision determination process has resulted in this area being one of the top control deficiencies reported by auditors of public companies. In response to this situation and recent tax shelter abuses and other aggressive tax positions, the FASB issued FIN 48 requiring specific recognition, measurement, and discloses with regard to uncertain tax positions. Those requirements will very likely substantially change the tax provision calculation and documentation process and the audit work performed by external auditors, including members of the firms’ tax teams. Tax team members will also now need a thorough understanding of SFAS No. 109 and FIN 48.

A participant taking this course will gain a sound knowledge of the theory of deferred taxes and how this theory can then be applied to practical situations. Many practical examples are included to illustrate the theory and the information is presented in such a way that participants will be able to apply this theory to any other situation that they may encounter, even though it may not be specifically covered by an example in the materials.

SFAS No. 109

This statement addresses financial accounting and reporting for the effects of income taxes that result from a company's activities during the current and preceding year

• Provides a balance sheet approach to computation of deferred tax assets and liabilities.
• Superseded SFAS No. 96, Accounting for Income Taxes, which superseded APB Opinion No. 11, Accounting for Income Taxes.

Prior to implementation of SFAS No. 109, a company had two choices to account for deferred income taxes. They could have followed APB Opinion No. 11, which was based on a comprehensive deferred approach from an income statement viewpoint. As an alternative, some firms were early adopters of SFAS No. 96, which was a balance sheet approach.

Scope of SFAS No. 109

SFAS No. 109 established standards of financial accounting and reporting for income taxes that are currently payable and for the tax consequences of

• Reporting of gains, revenues, losses, and expenses in taxable income in an earlier or later accounting period than recognized in financial income.
• Events other than differences in income that create differences in tax accounting and financial accounting bases of assets and liabilities.
• Operating loss or tax credit carrybacks for refunds of taxes paid in prior years and carryforwards to reduce taxes payable in future years.

The principles and requirements of SFAS No. 109 are applicable to

• Domestic federal (national) income taxes and foreign, state, and local (including franchise) taxes based on income. – For example, Texas has a franchise tax that is partially based on capital (.25%) or on income (4.5% of net taxable surplus). Deferred taxes should be provided to the extent that the tax exceeds the capital-based tax in a given year.
• A company's domestic and foreign operations that are consolidated, combined, or accounted for by the equity method.
• Foreign enterprises in preparing financial statements in accordance with U.S. generally accepted accounting principles.

SFAS No. 109 does not address

• Basic methods of accounting for any investment tax credits.
• Discounting.
• Accounting for income taxes in interim periods, except for – Criteria for recognition of tax benefits. – Effect of changes in tax laws or rates. – Changes in valuation allowances.

The purpose of this standard was to

• Change the criteria for recognition and measurement of deferred tax assets and various other requirements of SFAS No. 96 and
• Reduce complexity.

Objectives and Basic Principles

The objectives of this Statement are to

• Recognize the amount of taxes payable or refundable for the current year.
• Recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

The basic principles are as follows:

• A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.
• A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The currently enacted marginal tax rate will be used to estimate the tax effects unless graduated tax rates are a significant factor. If graduated tax rates are a significant factor, then the average tax rate will be used.
• The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.