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


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 

FAS 109: Accounting for Income Taxes 101

The Financial Accounting Standards Board’s (FASB) defined mission is to “establish and improve standards of financial accounting and reporting.”  This statement implicitly suggests that there are inefficiencies and problems in the current standards or, maybe more accurately, in the way the standards are applied.  This, unfortunately, is the case for any law, regulation or policy intended to govern a large group of people in a democratic society.  Everyone will apply the rule according to how they see fit, or according to how it benefits their needs. 


For this reason, FASB has had to implement very specific, lengthy rules to govern the appropriate way to account for Income Taxes.  The idea is to make sure that everyone, or most everyone, is on the same page and does things as uniformly as possible.


According to the FASB statement on FAS 109, it establishes:


financial accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting for income taxes.


The objective of this rule is assist accounting professionals in applying consistent standards for (a) recognizing the amount of taxes payable or refundable for the current year, and (b) identifying deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprises financial statements. 


The FAS 109 statement provides the following basic principles that must be applied in accounting for income taxes at the date of the financial statements:


a.            A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.

b.            A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carry forwards.

c.            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.

d.            The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

For more detailed information about this standard and how it applies, visit the or click here for a copy of the FASB Statement of Financial Accounting Standards No. 109.


"The Anatomy of a Corporate Scandal"

I recently attended a seminar entitled “The Anatomy of the Corporate Deal” at the National Bar Association's Convention and Exhibits in Detroit, Michigan.  The speakers on the panel for this seminar were Tamika Langley Tremaglio, Managing Director of Huron Consulting Group, Washington D.C.; Marc Sherman, Managing Director, Huron Consulting Group, Washington D.C.; and, Amy J. Conway-Hatcher, Partner in litigation practice at Morgan Lewis. 

The objective of the seminar was to explore the various types of corporate scandals and common investigation triggers and provide suggested approaches for damage control.  Tax fraud or unacceptable accounting and tax reconciliation practices were identified as major risks that could place a company at the forefront of a scandal.  This article will provide proposed responses strategies for handling this type of scandal. 

An investigation can be triggered by a number of things such as a civil lawsuit, a newspaper article, a whistleblower or at the instigation of an auditor.  Any allegations that challenge management integrity are material and should be investigated.  The level of detail of the investigation will depend on the level of management, the nature of the allegations and potential impact on the company.  Where information about wrongdoing is obtained from a “whistleblower”, this individual is expected to co-operate with future investigations into the scandal.  It is important to let this individual know that as general counsel, you represent the interest of the company and not the individual’s interests.  The individual has the right to obtain their own counsel to represent their interests.  Sometimes the first warning of trouble is the result of a FBI investigation when an agent contacts you to ask a few questions.  It is important to have a policy that provides guidance on how to respond to the Federal government inquiries.  It may be tempting to engage in a casual conversation with the agent, however, the panel advised that the employee or director should respond by stating that he or she would like to answer the questions but must speak to general counsel first.

Regardless of what triggers the investigation, a company should have a plan in place to assist with reducing the potential damage that may be caused.  The panel recommended having at least three people to contact during a crisis.  One panellist noted that the company’s auditors should only be contacted first if they are in the process of preparing financial reports to avoid misrepresentations in the report.  Otherwise, since auditors are likely to become more protective of their interests when they become aware that the company is conducting an internal investigation it is better to call someone else who will help determine the gravity of the situation and collect more information before reporting the issue to the company’s auditor.

When dealing with the audit committee, the Sarbanes Oxley Act (“S.O.X”) requires that a financial expert should be on the committee especially when the scandal involves financial issues.  Another thing to be aware of is the composition of any special committees that are formed to protect the interests of board members from allegations of wrongdoing.  Ensure that the board members who are the subjects of an investigation are not responsible for establishing this special committee. 

Continue reading ""The Anatomy of a Corporate Scandal"" »