The Protectors for Big Business –

FIN 48

THE FINANCIAL ACCOUNTING Standards Board (FASB ) on July 13, 2006, issued the final interpretation amending FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Of great importance was FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48. The purpose behind publishing the interpretations was to address the uncertainty in accounting for income tax assets and liabilities. FASB No. 109, in the past, contained no guidance on accounting for income tax assets and liabilities, resulting in businesses taking inconsistent positions. According to commentators on FIN 48 at a conference of international tax practitioners in Miami during December 2006, “FIN 48 is an attempt to reconcile the inconsistencies by prescribing a consistent recognition threshold and measurement of tax assets and liabilities. It also gives taxpayers a clearly defined set of criteria to use when recognizing and measuring uncertain tax situations for financial statements, as well as specifying additional disclosures regarding the uncertainty.”

The evaluation of a tax situation for FIN 48 purposes is based on a two-step process:

– The first step is recognition: the business determines whether it is more likely than not (which is a 50% or greater likelihood) that a tax situation would be upheld on examination, including resolution of any ensuing litigation process, based on the technical merits of the tax situation.

– The second step is measurement: the tax situation that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize on financial statements.

In asserting the more-likely-than-not standard, all the facts and circumstances are taken into account. Additionally, the taxpayer must presume that the tax situation will be examined by the IRS with full knowledge of all the facts, technical merits of the relevant tax law, and their applicability to the facts and circumstances of the tax situation.

The taxpayer may take into account any past administrative practices and precedents of the IRS in its dealings with the business, when those practices and precedents are widely understood. Finally, each tax situation must be evaluated without consideration of the possibility of offset or addition to other tax issues.

The appropriate timing of claiming the benefits of a tax issue is when it becomes clear that the tax issue has a more-likely-than-not chance of being upheld. If a previous tax issue does not meet the more-likely-than-not standard, then it shall be adjusted in the first period after the effective date of FIN 48 (January 1, 2007).

A business must classify the liability associated with an unrecognized tax issue as a current liability to the extent the business anticipates payment of cash within one year or the operating cycle, if longer. The liability for an unrecognized tax issue shall not be combined with deferred tax liabilities or assets.

In addition to taking into account the benefit that a particular tax issue will create for a particular business, interest and penalties must also be computed in addition to the tax liability, where required by the relevant tax legislation. A tax liability will cease to be a liability during the first interim period in which any one of the following three requirements exist:

– The more-likely-than-not recognition threshold is met by the reporting date.

– The tax issue is settled through negotiation or litigation, which is where the Tax Risk Management process plays a key role in assisting in arriving at this position where there is a problem.

– The statue of limitations for the IRS (prescription) to examine a tax issue has expired, unless there has been a fraud, misrepresentation, or nondisclosure by the taxpayer.

The advent of FIN 48, like SOX 404, underpins the requirement for businesses to embark upon a systematic Tax Risk Manaagement process to limit and expose, with the view to efficiently minimizing the incumbent risks of tax.

IFRS does exactly the same.

In accordance with Circular 230 Disclosure