A Continuous, Sustainable Approach to FIN 48
After quickly becoming the bane of a tax practitioner’s existence, FIN 48 provides an opportunity to elevate provision to a manageable process.
August 27, 2009
Mention FIN 48 to most tax practitioners and you are likely to hear a low, anguished groan. Issued in June 2006, Financial Accounting Standards Board Interpretation 48 — Accounting for Uncertainty in Income Taxes calls for the recognition and measurement of all tax positions taken or expected to be taken by all U.S. GAAP reporting companies.
FIN 48’s issuance marked the end of the tax cushion, which historically represented a largely indistinguishable yet highly malleable bundle of reserves typically set aside for the rainy day when a tax authority might question a return position. Tax practitioners’ lives would never be the same. Instead of a safe margin held in reserve to soften and smooth EPS fluctuations, companies today face a prescribed approach mandating review of every material uncertain tax position (UTP) ever taken that remains subject to audit whether by local, state, federal or international taxing authorities. This includes both return positions taken as well as decisions not to file in particular jurisdictions — since not filing is in essence a “position.”
Under FIN 48, positions are evaluated under a two-step process. The first step is recognition. This is a mandated “more likely than not” assessment of whether a tax position will be sustained upon examination by the taxing authority — assuming the authority has full knowledge of all relevant information.
The second step is measurement, which entails creation of a “cumulative probability matrix.” In this matrix of possible outcomes, the tax position is measured at the largest amount of benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement.
This is where it gets a bit complicated. Tax practitioners are asked to accomplish this not on a position-by-position basis, but rather on a "unit of account" basis. In other words, if a position taken could impact foreign source income, which would impact domestic inclusion, which in turn would impact state and local taxes, there could be four or more units of account with which to contend. Determining how to split what might first appear as a single position into separate units of account involves consideration of both internal company filing practice as well as the anticipated approach each tax authority may take during an examination.
It is fair to say that FIN 48 created a wave of consulting opportunities for the Big4 and regional tax practices. Now that the initial frenzy has subsided, how can companies manage uncertain tax positions on an ongoing basis so that the process is sustainable, efficient and does not introduce financial reporting risk? In addition, since the members of the convergence project between U.S. GAAP and IFRS reached an impasse and agreed to disagree on the accounting for uncertain tax positions, how do companies position themselves to comply with whatever new UTP accounting approach is ultimately decided upon as part of an IFRS conversion in the future?
To read the full article, please visit: A Continuous, Sustainable Approach to FIN 48 (PDF).
This article was previously printed in Corporate Taxation.
A Continuous, Sustainable Approach to FIN 48, David Deputy, Corporate Taxation
Copyright © 2009 Thomson/RIA
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David Deputy is the director of tax data management at Vertex Inc. in Berwyn, Pennsylvania.