Is your company ready for the FIN 48 challenge?

Financial Accounting Interpretation Number 48, known as "FIN 48," is the latest rule from FASB regarding accounting for uncertainty in income tax positions. It is effective for fiscal years beginning after Dec. 15, 2006, and affects public and private companies and companies that are for-profit or not-for-profit.

As a result, companies are charged with addressing new questions: What are their uncertain tax positions? What is the unit of account at which the recognition and measurement criteria apply? How much of a tax benefit can be recognized under the required criteria? How will they classify interest and penalties? How will the users of the financial statements--banks, private equity firms, investment bankers, potential acquirers of the business, other investors and the government--interpret the new required disclosure of uncertain tax positions in financial statements?

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For public companies, FIN 48 requires a great sense of urgency, as the potential effect of adoption must be disclosed on the remaining financial statements for 2006. Additionally, the actual effect of the adoption of FIN 48 must be reflected in the financial statements for the first quarter of 2007, with all 2007 financial statements prepared in compliance with FIN 48.

Privately owned enterprises will also need to address FIN 48 as part of their annual financial statements for the fiscal year beginning after Dec. 15, 2006. If interim financial statements are issued, then they will need to address it for all such statements issued for 2007.

To start the process, companies will need to inventory all of their uncertain tax positions. Some examples include the following: decisions to file or not file income tax returns in taxing jurisdictions (international, U.S. federal, state and local); decisions surrounding how and when companies report their income and expenses; decisions about income tax credits claimed; decisions to write off or capitalize expenditures; decisions about inter-company pricing for goods or services between related parties--domestic and international--and the list goes on.

Additionally, FIN 48 requires that all tax positions undergo a new process of recognition and measurement.

Recognition must conclude--more likely than not--that a tax position will be sustained upon an assumed examination. If the recognition standard is not satisfied, then no tax benefit otherwise arising from the tax position can be recorded for financial statement purposes. If the recognition standard is satisfied, the amount of tax benefit recorded for financial statement purposes will be the largest amount of tax benefit with a greater-than-50-percent likelihood of being realized upon ultimate settlement with a taxing authority.

FIN 48 complexities may be exacerbated in state, local and international matters due to the multitude of jurisdictions, less-authoritative guidance and greater volatility in state and foreign income tax law changes.

For most companies, FIN 48 will require a fresh look at all tax positions taken to determine which are uncertain. Then companies will have to document that the position meets the recognition and measurement process. This fresh look may require an adjustment to the beginning balance of retained earnings in the year of adoption for uncertain tax positions that do not meet this new standard.

--Contributed by Joe DeTrane, a partner and tax practice leader for Grant Thornton LLP's Greater Bay Area region. He can be reached at 415.986.3900 or [e-mail].