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Accounting for Income Taxes-Applying SFAS No. 109/FIN 48: A Whole New Ballgame!

Author/Moderator: Bobby J. Carmichael, EdD, CPA
Publisher: AICPA
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Ideal for self-study or on-site training

No other area in accounting is as far reaching, and requires knowledge of a vast number of topics in financial and tax accounting, as accounting for deferred taxes. With the FASB’s issuance of FIN 48, it is essential that members in industry and independent auditors be joined by tax professionals in industry and practice as active participants in this process. In addition to applying SFAS No. 109’s complexities to many common differences between financial accounting and tax compliance, you now must identify uncertain tax positions and apply specific criteria to recognize, measure and disclose these positions in the financial statements. You will gain a sound knowledge of the theory of deferred taxes and how this theory can be applied to practical situations. Many practical examples are included to illustrate the theory, and the information is presented so you will be able to apply this theory to any other situation you may encounter.

Objectives: 
  • Apply the complex rules of SFAS No. 109 to new and challenging situations
  • Apply the provisions of FIN 48 to uncertain tax positions
  • Identify and properly classify deferred tax assets and deferred tax liabilities
  • Compute the valuation allowance with consideration given to items that are allowed to reduce the need for an allowance
  • Utilize a five-step approach for more complex situations including intraperiod tax allocations

Prerequisite:  Experience in financial reporting

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: FIN 48 — Uncertainty in Income Taxes: A Must Know for Tax CPAs and Accountants/Auditors! includes a portion of the text and video content of this course.

*(169-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.

Table of Contents

  • Chapter 1- Theoretical Concepts of SFAS No. 109
    • Learning Objectives
    • Overview
    • SFAS No. 109
      • Scope of SFAS No. 109
      • Objectives and Basic Principles
    • Temporary Differences
      • Recognition and Measurement
      • Annual Computation of Deferred Tax Liabilities and Assets
      • Applicable Tax Rate
    • Sources of Taxable Income
    • Tax Planning Strategies
    • Determination of the Valuation Allowance
      • Changes in the Valuation Allowance
    • Changes in Tax Laws or Rates
      • Emerging Issue Task Force Consensus Opinion
    • Change in the Tax Status of a Company
      • Nontaxable to Taxable
      • Taxable to Nontaxable
      • Date of Recognition
      • C Corporation to S Corporation
    • FIN 48 - Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109
      • Objective and Rationale
      • Scope
      • Initial Recognition
      • Subsequent Recognition and Measurement and Changes in Judgment
      • Measurement
      • Disclosures
      • Interest and Penalties
    • APB Opinion No. 23 and U.S. Steamship Enterprise
      • Temporary Differences
    • Intraperiod Tax Allocation
    • Financial Statement Presentation
      • Financial Statement Disclosure
    • Effective Date and Transition
    • Provisions of SFAS No. 109 - Summary Chart
    • Questions
  • Chapter 2 - Concept of Temporary Differences
    • Learning Objectives
    • Differences in Tax Accounting and Financial Accounting
    • Differences That Do Not Have Tax Consequences
    • Identifying and Measuring Temporary Differences
      • Taxable and Deductible Temporary Differences
      • Types of Temporary Differences
      • Identifying Temporary Differences
      • Offset of Taxable and Deductible Amounts
      • Pattern of Taxable or Deductible Amounts
    • Questions
    • Case Studies
      • Case 2-1
      • Case 2-2
      • Case 2-3
      • Case 2-4
  • Chapter 3 - SFAS No. 109 - Accounting Procedures and a Four-Column Worksheet to Help Meet Reporting and Disclosure Requirements
    • Learning Objectives
    • Operating Loss Carryforwards
      • Tax Credit Carryforwards
      • AMT Tax Credit Carryforwards
    • Tax Planning Strategies
      • Net of Significant Expenses
      • Illustration of a Tax Planning Strategy
    • Determination of the Valuation Allowance
      • Determining the Need for a Valuation Allowance
      • Auditing Considerations of Deferred Tax Assets and Liabilities under FIN 48
      • Tax Accounting and Tax Internal Controls (SOX 404)
    • Recognition of Tax Benefits for Carrybacks and Carryforwards
    • Computation Worksheet to Meet Reporting and Disclosure Requirements of SFAS No. 109
      • Steps to Complete the Worksheet for SFAS No. 109
      • Worksheet for SFAS No. 109
      • Applicable Tax Rate
      • Average Tax Rate
    • Case Studies
      • Case 3-1
      • Case 3-2
  • Chapter 4 - Accounting for Uncertainty in Income Taxes under FIN 48
    • Learning Objectives
    • Aggressive Tax Positions
      • SFAS No. 5 Treatment of Uncertain Tax Positions
    • Accounting for Uncertainty in Income Taxes
      • Objective and Rationale
      • Scope
      • Tax Position
      • Initial Recognition
      • FIN 48 Liability versus Deferred Tax Asset or Liability
      • Unit of Account
      • Financial and Tax Auditing Considerations under FIN 48
      • Independence Impact of Providing FIN 48 Services to on Attest Client
      • Subsequent Recognition and Measurement and Changes in Judgment
      • FSP FIN 48-1, Definition of Settlement in FASB Interpretation 48
      • More-Likely-Than-Not Level of Confidence
      • Derecognition
      • Measurement
      • Classification
      • Disclosures
      • FIN 48 Disclosures Considered Tax Accrual Workpapers
      • Interest and Penalties
      • Transition and Effective Date
      • Deferral of Effective Date for Nonpublic Entities
      • Implications of Adopting FIN 48
    • Questions
    • Case Studies
      • Case 4-1
      • Case 4-2
  • Chapter 5 - Reporting and Disclosure under SFAS No. 109 - Theory and Examples
    • Learning Objectives
    • Financial Statement Disclosure
    • Separately Issued Financial Statements
      • Disclosure of Items Not Recognized
    • Components of Income Tax Expense
      • Methods of Separate Disclosure
    • Financial Statement Presentation
    • Disclosure Requirements
      • Illustrative Footnote
    • FIN 48 - Required Disclosures for Uncertainty in Income Taxes
      • SEC Position on Interim Period Disclosures
      • Illustrative Disclosures
    • Illustrations - Financial Statement Disclosures
      • Microsoft
      • PepsiCo
      • ExxonMobil
    • Questions
  • Chapter 6 - Advanced Applications of SFAS No. 109
    • Learning Objectives
    • Worksheet Adapted to Track Four Deferred Tax Accounts
      • Worksheet for SFAS No. 109 - Four Deferred Tax Accounts
      • Application of SFAS No. 109 with Four Deferred Tax Accounts
    • Special Deductions
    • SFAS No. 109 Applied to Provisions in the American Jobs Creation Act (AJCA) of 2004
      • Tax Deduction Provided to U.S.-Based Manufacturers
    • Recent and Commonly Applied SFAS Pronouncements with Deferred Tax Implications
      • Accounting for Share-Based Payment
      • Accounting for Asset Retirement Obligations
      • Impairment of Long-Lived Assets
      • Accounting for Costs Associated with Exit or Disposal Activities
      • Inventory Costs
      • Exchanges of Nonmonetary Assets
      • Accounting Changes and Error Corrections
      • Fair Value Measurements
      • Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans
      • Fair Value Option for Financial Assets and Financial Liabilities
    • Questions
    • Case Studies
      • Case 6-1
      • Case 6-2
  • Chapter 7 - Application of SFAS No. 109 to Business Combinations
    • Learning Objectives
    • Business Combinations
    • Intercompany Transfer of Assets Subsequent to Acquisition
      • Temporary Difference Not Recognized
    • Deferred Tax Accounting and Business Combinations
      • Nontaxable Purchase Business Combinations
      • Taxable Purchase Business Combinations
      • Nontaxable or Taxable Purchase Business Combinations
      • Emerging Issue Task Force Consensus Opinions
    • Tax Deductible Goodwill
    • Operating Loss and Tax Credit Carryforwards for Purchase Business Combinations
      • Criteria for Recognition of a Carryforward
      • Subsequent Recognition of Carryforward Benefits
    • Deferred Tax Recognition for Discontinued Subsidiaries
      • Emerging Issue Task Force Consensus Opinion
    • Case Studies
      • Case 7-1
      • Case 7-2
      • Case 7-3
      • Case 7-4
  • Chapter 8 - SFAS No. 109 - Intraperiod Tax Allocation
    • Learning Objectives
    • Introduction
    • Allocation to Continuing Operations
    • Direct Adjustments to Shareholders' Equity
    • Tax Benefit of Operating Loss Carryforward or Carryback
    • Interest and Penalties
    • Intraperiod Tax Allocation under SFAS No. 109 - General Considerations
      • Items Requiring Intraperiod Tax Allocation
      • Total Tax Expense - Intraperiod Tax Allocation
      • Graduated Tax Rates
      • Deferred Tax Expense - Intraperiod Tax Allocation
    • Steps to Allocate Total Tax Expense
      • Examples of Intraperiod Tax Allocation
    • Summary
    • Case Studies
      • Case 8-1
      • Case 8-2
  • Chapter 9 - SFAS No. 109 - Application for Specialized Issues
    • Learning Objectives
    • IAS and GAAP Convergence Project
      • Short-Term Income Tax Convergence Project
      • SEC Proposal to Eliminate Reconciliation Requirement for IFRS Financial Statements
    • Regulated Enterprises
    • Leveraged Leases
    • Quasi-Reorganizations
    • Foreign Assets and Liabilities
      • Foreign Nonmonetary Assets - Remeasurement Gain or Loss
      • Reporting for a Remeasurement Gain or Loss
      • Foreign Nonmonetary Assets - Restated for General Price-Level Changes
      • Foreign Nonmonetary Assets - Translation Adjustment Allocation of Income Taxes Directly to Equity
    • Emerging Issues Task Force Consensus Opinions
      • EITF Issue 92-8 - Accounting for the Income Tax Effects under SFAS No. 109 of a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary
      • EITF Issue No. 93-16 - Application of SFAS No. 109 to Basis Differences within Foreign Subsidiaries That Meet the Indefinite Reversal Criterion of APB Opinion No. 23
      • EITF Issue No. 95-9 - Accounting for Tax Effects of Dividends in France in Accordance with SFAS No. 109
      • EITF Issue No. 95-10 - Accounting for Tax Credits Related to Dividend Payments in Accordance with SFAS No. 109
      • EITF Issue No. 95-20 - Measurement in the Consolidated Financial Statements of a Parent of the Tax Effects Related to the Operations of a Foreign Subsidiary That Receives Tax Credits Related to the Dividend Payments
      • EITF Issue No. 98-11 - Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations
    • Questions
  • Chapter 10 - Ethics Focus: Accounting and Auditing
    • Ethics Overview
    • Recent Developments
    • Spotlight on Independence
    • Key Ethical Dilemmas
    • Addressing Ethical Dilemmas
    • Available Resources
  • Chapter 11 - Latest Developments

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Excerpts

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 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.
  • The measurement of deferred tax assets is adjusted to the amount that is expected to be realized based on available evidence at the measurement date.

Exceptions to the basic principles above are as follows:

  • Some special areas addressed by APB Opinion No. 23; these will be discussed later.
  • Special transitional procedures for temporary differences related to deposits in statutory reserve funds by U.S. steamship enterprises.
  • Does not address accounting for leveraged leases.
  • Prohibits recognition of a deferred tax liability or asset related to goodwill for which amortization is not deductible for tax purposes.
  • Does not address accounting for income taxes paid on intercompany profits on assets remaining within the group and prohibits recognition of a deferred tax asset for the difference between the tax basis of the assets in the buyer's tax jurisdiction and their cost as reported in the consolidated financial statements (ARB No. 51, Consolidated Financial Statements).
  • Prohibits recognition of a deferred tax liability or asset for differences related to assets and liabilities that are remeasured from the local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes (SFAS No. 52, Foreign Currency Translation).

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Videocourse Details

NASBA Field of Study: Accounting
Level: Intermediate
Recommended CPE Credit: Text — 15; DVD/Manual — 18
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Accounting for Income Taxes — Applying SFAS No. 109/FIN 48: A Whole New Ballgame!
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