overview of fin 48

Overview of FIN 48

On July 13, 2006, the Financial Accounting Standards Board released FIN 48, Accounting

for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109. The

Interpretation was the result of a more than two-year process of study and deliberations on

the part of the FASB, inclusive of external public comments. The FIN 48 rules require a

two-step process that involves recognition and measurement. The interpretation is

effective for fiscal years beginning after December 15, 2006. The cumulative effect of the

change in retained earnings as a result of the change is required to be disclosed as of the

date of adoption.

A. Scope

FIN 48 applies to all tax positions accounted for in accordance with FAS 109. FIN 48 does

not consider above the line type taxes (ie. Payroll, VAT, and other indirect taxes). The

interpretation defines a tax position as a position taken in a previously filed tax return or a

position expected to be taken in a future tax return that is reflected in measuring current or

deferred income tax assets and liabilities for interim or annual periods.1 A tax position

encompasses the following: a permanent reduction of income taxes payable, a deferral of

income taxes otherwise currently payable to future years, and a change in the realizably of

deferred tax assets.

B. Recognition

Under FIN 48, the entity must first determine the appropriate unit of account for

determining whether the recognition threshold is met for a tax position. The appropriate

unit of account is determined by considering "the manner in which the enterprise prepares

and supports its income tax return and the approach the enterprise anticipates the taxing

authority will take during an examination."3

In order for the tax position to be recognized, FIN 48 requires that the entity taking a tax

position "shall initially recognize the financial statement effects of a tax position when it is

more likely than not, based on the technical merits, that the position will be sustained upon

examination."4 The threshold of "more likely than not" is defined as a likelihood of greater

than 50 percent that the position will be sustained upon examination. In order for an entity

to determine this threshold, it must consider and evaluate all of the facts and circumstances

available at the reporting date, including, but not limited to, the technical merits based on

the relevant tax law.

C. Measurement

Once it is determined that the tax position meets the more likely than not threshold then the

position must be properly measured. Under FIN 48, the position "shall initially and

subsequently be measured as the largest amount of tax benefit that is greater than 50

percent likely of being realized upon ultimate settlement with a taxing authority …."6 The

measurement of a tax position should consider the amounts and probabilities of the

outcomes that could be realized upon ultimate settlement based upon the best available

information at the reporting date.

D. Interest and Penalties

FIN 48 allows a company the option of classifying interest and penalties as components of

either income tax expense or other expense, depending on its accounting policy. Interest

should be recorded in the first period the interest would begin accruing according to the

relevant tax law. The statutory rate of interest should be applied to the underpayment.

Penalties should be applied at the point where the tax position does not meet the minimum

statutory threshold to avoid payment of penalties.7

E. Disclosures

As stated above, the company will need to disclose their policy on classification of interest

and penalties in the footnotes to the financial statements.

Additionally, a tabular reconciliation of the total amounts of unrecognized tax benefits at

the beginning and end of the period will need to be prepared. The reconciliation must


The gross amounts of increases and decreases in unrecognized tax benefits for

prior periods

The gross amounts of increases and decreases in unrecognized tax benefits for

current periods

The decreases in unrecognized tax benefits related to tax settlements

The decreases in unrecognized tax benefits as a result of the expiration of statute

of limitations

If an uncertain tax position has a reasonable possibility of changes within 12 months, the

nature of the change needs to be disclosed. A description of open tax years by major tax

jurisdicitons is also required to be disclosed.

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