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Despite widespread opposition to the standard governing uncertain tax positions, FIN 48 won't go through the board's rulemaking process again.
Sarah Johnson, CFO Magazine
May 15, 2012
The Financial Accounting Standards Board has ended any lingering hope that it will rethink one of its more controversial rules. The standard-setter announced in March that it will not review FASB Interpretation No. 48 (FIN 48, also known as Topic 740), its rule for accounting for uncertainty in tax positions.
FIN 48 has been near the top of finance executives' lists of the most-hated FASB measures ever since it was issued six years ago. Critics complained that it would provide the Internal Revenue Service with a road map to a company's most controversial tax positions. Finance chiefs and tax managers pelted the board with protests during the rulemaking process, asking for more clarification and time to adopt the rule.
FASB's announcement came in response to a January report by the board's oversight body, the Financial Accounting Foundation. The report concluded that "on balance, the benefits of FIN 48's improved consistency and reporting of income tax uncertainty information outweigh its costs." The report was the first of its kind since the FAF decided in 2010 that it would start making postimplementation evaluations of FASB's rules.
FASB, which has its own process for evaluating its rules after they have 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 public statement. 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 IRS 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 it is not the type of information companies want to reveal to the tax man or their competitors. Large companies found the rule time-consuming to implement at first, and smaller companies found it especially difficult to do so.
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 looked at the rule in 2010, when it made what it characterized 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 currently reviewing FASB's rules for business combinations (FAS 141R) and segment reporting (FAS 131).