What FIN 48 Means to Private Companies
When the Financial Accounting Standards Board (FASB) delayed implementation of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, for nonpublic companies, it was issuing a reprieve, not a pardon. And guess what? Time is just about up.
FIN 48 applies to all entities that prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) and governs all material positions those entities take on their income tax returns. FIN 48 is effective for privately held businesses for periods beginning after Dec. 15, 2007. For most businesses, this means calendar year 2008 statements.
More transparency
FASB issued FIN 48 in 2006 to make financial statements more transparent and comparable with respect to taxes. Businesses are always looking for ways to minimize their tax liability, and their tax returns often include positions that are open to interpretation. The financial statements could include these positions that may not ultimately withstand tax authorities' scrutiny.
Under FIN 48, companies may include tax benefits in their financial statements only if the underlying tax positions are more than 50% likely to be sustained on examination.
The tax positions FIN 48 specifically identifies include:
n Excluding potentially taxable income streams,
n Classifying a transaction, entity or position as tax-free, and
n Deciding not to file a tax return in a jurisdiction where it might be required.
Businesses can no longer assume that issues underlying such decisions will go unnoticed. They must presume that tax authorities will have all the relevant facts, and they may find themselves with increased state income tax liability as a result.
Many businesses, for example, use out-of-state vendors to supply parts for their production processes. If a vendor holds physical property owned by the business, the owner of the property may well be subject to income taxation in the other state or states.
One size doesn't fit all
More problematic for most companies, however, are tax positions that don't meet the "more likely than not" threshold for sustainability. In the past, companies simply bundled all their uncertain positions together and maintained a reserve large enough to cover interest and penalties that could accrue if some of the positions didn't hold up.
FIN 48 is stricter. Every year companies must reconcile their total unrecognized tax benefits at the beginning and end of reporting periods, disclose the unrecognized benefits that, if recognized, could affect their income tax positions, and accrue the interest and penalties that could be assessed if the tax positions don't hold up and that are recognized in the statement of operations and in the statement of financial position.
In addition, if unrecognized tax benefits are likely to change significantly within a year of the report, companies must disclose the nature of the uncertainty, what could happen that would cause the change and an estimated range of the possible change that could occur.
It's time to be certain
FIN 48 is a rule intended to increase transparency and, as a result, clear up uncertainty for tax officials, but it has generated a great deal of uncertainty among businesses. Privately held companies have less than a year to address their questions; time is running out.
If you have questions about FIN 48, contact Mike Ziembo at mziembo@badencpa.com or 260-969-2528. |
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Mike joined
Baden, Gage & Schroeder in 1995. He provides clients with audit, accounting, financial modeling, activity based costing and technology enhancement services. He has also provided outsourced controller services to manufacturing, distribution and service clients. |
