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FIN 48, the standard governing uncertain tax positions, won't go through the board–s rulemaking process again.
Sarah Johnson, CFO.com | US
March 21, 2012
The Financial Accounting Standards Board has stifled any lingering hope that it will rethink one of its more controversial rules. In an announcement made this morning, the standard-setter said it will not review FIN 48 (also known as Topic 740), its rule for accounting for uncertainty in tax positions.
For some time, FIN 48 has been near the top of many CFO lists of the most hated FASB standards. Finance chiefs and tax managers pelted the board with protests during the rulemaking process, asking for more time and clarification over how to follow it.
The statement comes in response to a January report by FASB's oversight body, the Financial Accounting Foundation. The FAF gave the rule a standard, lukewarm review, concluding that its benefits - including improved consistency of reporting of income-tax uncertainty - outweigh its costs. The FAF's report was the first of its kind since FASB's trustees decided to make postimplementation evaluations of the board's rules in 2010.
FASB, which has its own process for evaluating its rules after they've been adopted by companies, interprets the FAF's view of FIN 48 as meaning the rule is effective. "The criteria for a review or reconsideration of FIN 48 were not met," the board said in a press release. FASB would have formally revisited the rule if the cost of compliance differed from its initial expectations or if investors did not find the information resulting from the standard useful.
The rule was designed to make companies' reporting of uncertain tax positions more consistent. Under FIN 48, companies must disclose how much they have in reserve in case the Internal Revenue Service or state tax officials disagree with their use of tax treatments. The estimate is recorded as a tax liability on their balance sheets. It's not an easy calculation to make and not the type of information companies wanted to expose to their competitors or the taxmen. Large companies found the rule time-consuming to implement at first, and smaller companies found it especially difficult.
The board issued the guidance in 2006 but twice delayed the effective date for private companies, which finally began complying for fiscal years ending after December 15, 2008. The board last took a look at the rule in 2010, when it made what it characterizes as minor technical changes.
In its report, the FAF concluded that investors are making use of the information they get out of FIN 48, even though comparability between companies does not always exist. The FAF suggests that the lack of comparability stems from "managements' judgments and tax code complexity."
Despite refraining from making changes to the existing rule, FASB said it would take the FAF's feedback into account for future standard-setting efforts, including getting investors more involved in its process and better explaining how it comes up with its cost-benefit analyses.
The FAF is now reviewing FASB's rules for business combinations (FAS 141R) and segment reporting (FAS 131).