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FIN 48: The Show Must Go On

More steps for the auditor to consider under the FIN 48 model.

July 31, 2007
Sponsored by LexisNexis

The seven-member Financial Accounting Standards Board (“FASB”) voted unanimously on January 17, 2007 against the postponement of FIN 48. The decision came despite written requests by over 400 companies and several trade groups to extend FIN 48’s effective date to fiscal years beginning after December 15, 2007.

In many respects it was a decision heard ’round the world as FIN 48 affects not only entities preparing accounts under U.S. GAAP (Generally Accepted Accounting Practices), but also foreign SEC (Securities Exchange Commission) registrants who are required to apply FIN 48’s recognition and measurement guidance in their SEC reporting.

The Fight for Postponement

Leading the charge for FIN 48’s postponement was the Tax Executives Institute (TEI). In its December 12, 2006 letter to the FASB, TEI “strongly urge[d] the Financial Accounting Standards Board to delay the effective date of FIN 48 … to allow companies and their independent auditors sufficient time to address the substantive, procedural and documentation challenges posed by the new interpretation.” For example, TEI and others advocated that further guidance should be issued on the meaning of “all” for purposes of “all income tax positions,” and whether there is (and, if so, what is) the concept of materiality for purposes of FIN 48. Text of the TEI letter is available via Tax Analysts Tax Notes Today on LexisNexis Tax Center (tax.lexisnexis.com) at 2006 TNT 239-41.

War Wages On

While such questions, debates and letter writing campaigns were in full force, practitioners serving clients on the front lines were moving forward and working overtime to interpret, implement and address potential post-adoption FIN 48 technical reporting and disclosure issues. Most recently, Deloitte Tax LLP hosted a Webcast entitled “Living With FIN 48: What do we do after the cumulative effect is booked?” The Webcast offered technical guidance on post FIN 48 adoption quarterly considerations, and disclosures were also discussed.

The Webcast highlighted the fact that under FIN 48 there is the same quarterly reassessment of uncertain tax positions as under the old FAS 5 model, but now temporary differences are more in the mix and the auditor must also take note of the following criteria:

  1. Are there any new uncertain tax positions that have not been previously identified?
  2. Is there new information in the quarter under examination that would change the unit of account for a certain uncertain tax position or the recognitition conclusion about an uncertain tax position?
  3. Should the interest and penalty calculation be rerun?

Increased Burden on Auditor to Stay Abreast of Changes in the Law

There are more steps for the auditor to consider under the FIN 48 model as a result of the fact that temporary differences are more of a consideration. As a result, there is an increased burden on the auditor to stay abreast of new laws, regulations and cases that may impact a company’s quarterly reserve after its implementation calculations have been completed. To effectuate this, Alerts may be set up on LexisNexis Tax Center to notify the auditor to changes in the regulations. Knowing that a regulation is now final, for example, may change a previous recognition conclusion. Specifically, a finalized regulation may lead to a derecognition of benefits from the date of adoption, or conversely, a recognition of benefits.

Furthermore, the issue of quarterly disclosures has been a hotly contested area in the FIN 48 post-implementation world. Companies and tax practitioners alike are concerned that their quarterly disclosures could have an impact on their future negotiations with tax authorities in the U.S. and offshore. The SEC has made it clear that despite such concerns, they will be looking closely at these disclosures. Therefore, it would be prudent for the auditor to utilize Tax Analysts Tax Notes Today in order to stay abreast of such developments and thoughts from the SEC and FASB.

Parting Shot

Many of the new FIN 48 requirements bring to light the potential need for federal and state tax opinions by independent legal counsel in connection to the treatment of specified uncertain tax positions under FIN 48. So, with auditors, tax departments and legal counsel working to comply with FIN 48 and keeping abreast of its latest developments and tax impact, it is expected that although there will be some early growing pains, the FASB’s goal of reducing inconsistencies in recognizing, measuring and presenting income tax in financial statements through FIN 48 will no doubt soon be accomplished.          

Request a free excerpt of Danielle Rolfe, Esq’s analytical coverage of FIN 48. Complete treatise available on LexisNexis Tax Center. Offer expires August 31, 2007.

Request more information or a free trial of Tax Center.