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FIN 48: The More Likely Than Not Standard. Accounting for Uncertainty

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Almost six years ago, in June 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48, affectionately known as FIN 48.  FIN 48 is an interpretation of the Statement of Financial Accounting Standards No. 109, referred to as FAS109 in the accounting and tax community, which was originally issued in February 1992. 

 

FAS109 basically provides rules to govern the appropriate method for accounting for income taxes for financial accounting and reporting standards purposes.  The acceptable approach requires an asset and liability approach when accounting and reporting for income taxes.  The objective of FAS109, is to assist accounting professionals with presenting a consistent view on how to recognize the amount of taxes that are payable or refundable for the current year, as well as accurately identifying deferred tax liabilities and assets to determine tax consequences for future tax years.  

 

FIN48 specifically provides clarification on how to account for uncertainty in income taxes that have been recognized in an entities financial statement.  FIN48 provides a recognition threshold for financial statement recognition and measurement of a tax position.   It is important to understand the terminology to appreciate how FIN48 is applied in practice.

 

Tax position:  This includes tax positions taken in previously filed returns or expected to be taken in future tax returns.  These position measure current or deferred income tax assets and liabilities.  A tax position can have the following impact on an entity’s overall tax payable:

 

(1) permanent reduction;

(2) deferral;

(3) change in “realizability” of a deferred tax asset

 

Recognition:  The appropriate standard for determining whether a tax position needs to be recognized – accounted for – in an entity’s financial statements is “more-likely-than-not”.  Because this is an objective standard, there are variations on what types of items are considered to fall on the “more-likely” side rather than the “ “not” side of the equation.  The rule of thumb, however, requires that the person making this judgment base the decision on the technical merits of the tax position being sustainable in the event of an examination.  On a percentage basis the appropriate assessment threshold that can support that an entity is more-likely to be entitled to an economic benefit from a tax positions is above the 50% threshold. 

 

In order to substantiate a more likely than not position, a tax professional must consider the technical merits of the position based on authorities in tax law, which includes legislation and statutes, legislative intent, regulations, rulings and case law.  Each tax position must be evaluated independently.  In other words, there can be no reliance on the possibility of offsetting a tax position or aggregating a tax position with another one.  Further, the measurement of a tax position (how much should be recognized if the threshold is met) must consider the probability of the outcome based on the governing authority.

 

There are circumstances where an entity’s initial categorization of a tax position may change over time.  For example, if an entity accounted for a certain amount of liability in a class action lawsuit which would have been payable in 5 years, but the matter is dismissed a year after it was initiated then the entity must make adjustments to their accounting records.  Similarly, where the statute of limitations for a reassessment of tax expires and the entity no longer has an obligation to pay an anticipated additional assessment then the benefit of the tax position can be recognized.   Although in this example the tax position is legally extinguished this is not a requirement for making a change.  Management is simply required to make its best judgment given the facts and circumstances and the information available at the reporting date.

Written by Marsha Henry 

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