Prior to the effective date of the interpretation, companies generally followed the principles under FASB Statement No. 5 (FAS 5), “Accounting for Contingencies,” for recording the risk associated with a tax position.
Effective Date
For public companies FIN 48 is effective for fiscal years beginning after Dec. 15, 2006 (at Jan. 1, 2007, for calendar-year companies). The effective date for nonpublic companies (under FASB Staff Position FIN 48-2) is delayed for one year and will therefore be effective for fiscal years beginning after Dec. 15, 2007. Earlier adoption is permitted as of the beginning of a fiscal year, provided the company has not yet issued financial statements for that fiscal year or an interim period in that year.
Background
A company’s tax positions may change over time because of developments by taxing authorities and results of tax court cases. When determining the appropriate income tax benefit to record, companies have taken differing approaches. Some companies assess the likelihood of a position being sustained under a taxing authority examination; some additionally include the probability of such an examination occurring. Some companies record a benefit only if the “probable” threshold of sustainability under a tax examination has been met. And, some companies simply record tax assets and liabilities based on what was filed on their income tax returns.
A Two-step Process
Evaluating a tax position under FIN 48 is a two-step process and may require management to perform a more robust review and documentation of potential uncertain tax positions. A key assumption in the interpretation is that a company must factor in the probability of being audited as 100 percent likely (that is, audit detection risk cannot be considered).
So, for purposes of determining the likelihood of being sustained, the taxpayer has to presume the position would be examined by the relevant taxing authority that has full knowledge of all relevant information. Consequently, the tax benefit of a position that would not be sustained under tax examination could not be recorded.
Action Plan
It is important to establish a game plan for assessing the impact of FIN 48 on your organization and implementing its provisions in a timely fashion. We encourage you to work with your accounting and tax service provider(s) throughout the process to get their input and buy-in on key decisions made along the way.
