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Uncertain positions: FIN 48, accounting for uncertainty in income taxes.

The Financial Accounting Standards Board recently released FASB Interpretation 48 (FIN 48), which provides guidance on FASB Statement 109 (FAS 109) and describes the standard for recognizing and measuring the benefit or liability from tax positions reflected in financial statements.

In general, the attributes of a tax position are recognized only if the position is more likely than not to be sustained upon examination, including the appeal process and litigation. When evaluating this threshold, CPAs should consider that the position will be examined by the appropriate taxing authority with knowledge of all relevant information.

The next step is to measure the amount of the tax attribute to report on the financial statement. The amount reported is the largest benefit that is more likely than not to be sustained upon examination. The difference between what is reported on the financial statement and the tax returns will either reduce the deferred tax asset or refund, or increase the deferred tax liability.

If a tax position subsequently meets the more-likely-than-not requirement, then it should be recognized in the next financial reporting period. Conversely, tax positions that no longer meet the more-likely-than-not requirement should be derecognized in the next financial reporting period.

FIN 48 states that use of a valuation allowance is not an appropriate substitute for derecognizing the tax position.


Where FAS 109 provided for the financial statement recognition of tax attributes, FIN 48 provides specific guidance addressing accounting for the uncertainty of tax positions.

Recognizing the tax law's complexity and perceived inconsistency regarding when to recognize, derecognize and measure tax attributes, FASB issued FIN 48 to promote greater consistency of and comparability in reporting income tax assets and liabilities.

More-Likely-Than-Not Criteria

In FIN 48, a tax position is recognized in financial statement reporting when it is more likely than not based on its technical merits, and that the position would be sustained upon examination.

In evaluating this requirement, there is no allowance for likelihood of detection. Since it's presumed that the position will be evaluated by a taxing authority, the technical merits of a tax position are to be evaluated on tax law, including legislative intent, regulations, rulings and case law.

In addition, when the past administrative practices and precedents of the taxing authority in its dealings with the enterprise or similar enterprises are widely understood, they also should be taken into account.

FIN 48 does not resolve how an enterprise should document compliance with the more-likely-than-not requirement. However, meeting the requirement is frequently subject to interpretation. CPAs are advised to consult with their clients on how to document meeting this threshold. Enterprises might obtain legal opinions when documenting meeting the more-likely-than-not requirement.

Interest and Penalties

When a tax position is taken that does not meet the more-likely-than-not requirement, FIN 48 requires the enterprise to recognize interest expense in the first period that the interest would begin accruing under relevant tax law. Similarly, when the tax position does not meet the statutory threshold to avoid penalties, the enterprise will recognize an expense for the penalty amount.

Effective Date

FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. It also recommends implementing these provisions earlier where financial statements have not yet been issued or when other interim financial statements are issued.

Other Issues

While most of FIN 48's focus on tax positions concerns tax strategies and whether or not the related benefits meet the more-likely-than-not requirement, net operating losses also are affected.

Commonly, when management believes it is more likely than not that there will not be sufficient future income to use the NOLs, there is a valuation against the tax assets. However, in light of FIN 48, the reverse is also true. When the facts and circumstances indicate that the NOLs will more likely than not be used, the valuation allowance would be reduced or removed.

Many CPAs may not pay close attention to FIN 48 because they perceive that it only applies to publicly traded or large companies. However, financial statements prepared under GAAP are subject to these standards, even for smaller privately held companies.

CPAs should pay particular attention to reporting tax attributes when there is a taxing authority audit or when the certainty of a tax position is in doubt. CPAs should evaluate existing tax accruals for items that do not meet the more-likely-than-not requirement.

FIN 48 does not change the materiality criteria; it also applies to tax positions. Immaterial tax items would not affect the financial reporting.

Conrad Davis, CPA is a partner at Sacramento-based Ueltzen & Company, LLP providing financial statement and tax services. You can reach him at


By Conrad Davis, CPA
COPYRIGHT 2006 California Society of Certified Public Accountants
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Title Annotation:corporatetax
Author:Davis, Conrad
Publication:California CPA
Date:Nov 1, 2006
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