Reform Effort Rebuked

The Stone decision may play an important role in what seems likely to be an onslaught of upcoming cases involving stock-option backdating. Rather than suing directors on the simple basis that they allowed backdating to occur, plaintiffs will have to allege that the directors backdated options on purpose. Of course, if a director himself benefited from board-approved backdated options, such an allegation could be easier to prove. — K.O'S.

Fear of FIN 48

In January, the Financial Accounting Standards Board surprised businesses by refusing to delay issuance of FIN 48, an attempt to clarify how companies account for uncertain tax positions on their financial statements. The guidelines, effective for fiscal years starting after December 15, 2006, have generated a good deal of confusion and uncertainty.

"The new guidelines are meant to create consistency, but they're not clear," says Marian Rosenberg, a tax analyst for Thomson Tax & Accounting. Under FIN 48, "managers have to make a lot of subjective decisions."

Chief among FIN 48's new requirements is that companies should assume the IRS will examine their uncertain tax positions, leaving it up to them to determine whether those positions will pass muster. And if the company takes a tax position that may be subject to a legal claim, the guidelines require the company to figure out what the resolution will be before reporting the position on its financials. Says Rosenberg: "It's difficult to determine what the outcome of a dispute will be when the issue hasn't even been disputed yet."

Aside from causing tax analysts and CFOs to assume the worst, the guidelines will create "a tremendous amount of extra work" for finance and tax departments, says Bob Willens, a tax analyst at Lehman Brothers.

There is also concern about another form of pain: a recent survey by the Corporate Executive Board found that 68 percent of corporate controllers and heads of taxation expect that audits and requests for supporting documentation will increase as a result of FIN 48.

FIN 48 adds other complications as well. A particularly painful example is the R&D tax credit, recently revived by Congress. Although welcomed by business, squaring the new, complex tax-credit calculations with FIN 48 will send many companies scrambling. — L.D.

All Clear Now?

Under FIN 48, companies are required to disclose information on uncertain tax positions when it is "reasonably possible" that the amount of unrecognized tax benefits will change significantly within one year. But controllers and tax professionals disagreed on the definition of "reasonably possible."

70% said it meant there was a 20% probability

22% said it meant a probability over 30%

8% said more than a 10% probability

Source: Corporate Executive Board

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