GAAP and IFRS

FASB Delay Eases Tax Uncertainty

A possible delay of FIN 48 could make it easier to comply with the recently revived research tax credit.
Helen ShawJanuary 16, 2007

Companies have been vigorously lobbying the Financial Accounting Standards Board to delay FIN 48, Accounting for Uncertainty in Income Taxes. As of press time, it is all but certain that the accounting standards-setter will, at its board meeting on January 17, postpone the interpretation’s implementation for one year.

A delayed effective date for FIN 48 would result in one positive certainty: companies will experience less “uncertainty” when claiming the research and experimentation tax credit this year.

Many companies breathed a sigh of relief when the research and experimentation tax credit was extended during the last hours of the 109th Congress in December 2006. But the double task of claiming the newly passed tax credit and complying with FIN 48 could be surprisingly thorny.

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The research tax credit is “one of the most dynamic calculations there is,” said Adam Uttley, a partner in KPMG’s federal tax practice, in a recent KPMG conference call. And when it takes effect, FIN 48 will require that companies determine the likelihood that any tax claim will survive a challenge from IRS auditors. That would add substantially to the complexity of claiming the research tax credit, explains David Culp, a senior manager in KPMG’s Washington national tax practice.

“It’s now a multi-step process: a ‘back of the envelope’ calculation will not be acceptable under the new [tax] regulation,” Christine Kachinsky, a partner in KPMG’s research credit services group, told CFO.com.

Claiming the tax credit and complying with FIN 48 would require companies to deal with a host of different factors that could affect both their tax returns and their financial statements. Given that the tax credit expired at the end of 2005 and wasn’t revived until late December 2006, many companies did not collect the information needed to calculate the credit’s benefits, explains Kachinsky. “From a CFO perspective, additional effort needs to be expended now to get their arms around what their R&D benefit would be,” said Kachinsky.

To calculate the R&D benefit, finance departments now must consider two different calculation methods separately, to determine whether to use the old calculation, or the new, ‘alternative simplified method,’ Culp explained in an interview with CFO.com.

At the same time, FIN 48 will require finance chiefs to consider whether the R&D credit is material to their financial statements, says Kachinsky. Also, they must determine if the credit had a material impact on the company’s tax rate and whether enough information has been gathered to determine that effect, she added.

Furthermore, there are subjective elements in the tax credit, which could make it difficult to measure and recognize the credit properly as required by FIN 48, said Kachinsky. As a result, finance departments need to make adjustments to their calculations based on what is “more likely than not” to be realized — a standard that means a tax position has a greater than 50.01 percent chance of prevailing in an audit.

“The subjective nature of the credit, [a company’s] IRS exam history, and company-specific issues might create complications around getting to the right result for FIN 48 purposes,” said Kachinsky.

Experts say FASB is almost certain to delay FIN 48, sparing companies at least some of these complex calculations. Originally, FIN 48 was intended to become effective for fiscal years beginning after December 15, 2006. If, as is likely, FASB delays its implementation for a year, companies will likely be able to breathe another sigh of relief — but only for another year.