GAAP and IFRS

That Uncertain Something: FASB and Taxes

The board's project Accounting for Uncertain Tax Positions attempts to clarify when tax benefits may properly be recognized.
Lisa YoonJanuary 16, 2006

Last Wednesday, the Financial Accounting Standards Board continued its deliberations on accounting for uncertain tax positions. This FASB project has received relatively little media coverage so far — but you’re likely to read much more next year, come corporate earnings season.

The goal of the project — Accounting for Uncertain Tax Positions, which applies to Statement No. 109, Accounting for Income Taxes — is to clarify when tax benefits may properly be recognized. At present, absent clear guidelines, there are a variety of ways companies handle the accounting. A company can book tax benefits that are uncertain but supportable, and in making that reckoning, the company can count the possibility that the IRS doesn’t audit that particular benefit at all.

Under FASB’s proposed guidelines, a company would be able to book tax benefits only if it is “more likely than not,” or has a 50.1 percent chance, to stand up to an audit. Further, the company must assume that every uncertain tax position will be audited by the IRS, and it must take that assumption into account in its determination of “more likely than not.”

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FASB published its exposure draft in July; the comment period ended in September.

One aspect discussed by board members last week was accounting for interest and penalties on underpayment of taxes. Currently, some companies recognize interest when the IRS assesses it; others recognize interest when it is incurred. The board voted that for all companies, interest and penalties should always be booked when incurred, based on provisions of the tax law.

The board also considered the two schools of thought regarding the amount of interest expense to recognize. Some companies accrue interest on the difference between the tax deduction recognized in the return and the deduction on the financial statements; others accrue based on an estimate of the ultimate settlement with the IRS. The board voted that all companies must follow that first practice.

After the new interpretation goes into effect (for the first annual period beginning after December 15, provided FASB finalizes the new provisions this spring), previously recorded tax benefits that no longer pass muster will necessitate a charge to earnings. The board voted in favor of this approach rather than requiring a restatement.

The new rules present a more worrisome problem for companies, however, according to Lehman Brothers tax analyst Robert Willens. A company that discloses uncertain tax positions, he maintains, will virtually be holding up an arrow, pointing the IRS toward controversial tax benefits it might audit. (Not to spoil the ending, but when a company faces an audit, the IRS usually wins.)

“And once the IRS gets through with you, you end up paying them after all,” says Willens. He believes that the new rule will cost U.S. companies billions of dollars “in both charges to earnings and checks written to the IRS.”

At this Wednesday’s meeting, FASB will consider:

• Remaining issues regarding postretirement benefit obligations, including pensions;

• A proposed amendment on accounting for changes in income-tax-related cash flows in leveraged leases.