Tax Stunner: FASB Rejects FIN 48 Delay

In an unexpected move, FASB unanimously rejected some 400 corporate requests for a one-year delay of its new standard on accounting for uncertain t...
Helen Shaw and Marie LeoneJanuary 17, 2007

At its board meeting today, the Financial Accounting Standards Board stunned tax experts and companies alike when it unanimously rejected calls for a one-year delay in the implementation of FIN 48, Accounting for Uncertainty in Income Taxes. The accounting rule is effective for fiscal years beginning after December 15, 2006, which means those companies will have to comply by the end of this quarter. The standards board had received some 400 corporate comment letters, most of them calling for a delay.

Instead, the staff recommended that the board provide a better explanation of “ultimate settlement,” a phrase referring to the point at which companies can confidently say they have finished accounting for the uncertainty in their tax positions.

FASB expects to provide the implementation guidance on “ultimate settlement” quickly — in time to help companies comply by the end of the first quarter of 2007.

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“I was flabbergasted, shocked, by the decision,” Lehman Brothers tax expert Robert Willens told “This is a poor decision on [FASB’s] part.” Willens, who had earlier predicted that the standard setter would delay implementation, speculated that the decision may have been made in part because “FASB doesn’t want to be seen as bending to the will of Corporate America.”

But the arguments presented by corporate executives had merit, he contended. “In my view they had a pretty persuasive case,” declared Willens, who says that passage of the rule at this time may not provide “useful” information because companies “just don’t have the time to comply with FIN 48.”

Beginning in December, hundreds of corporations and organizations sent comment letters to FASB asking for a delay, citing application and documentation difficulties with the interpretation.

However, during its January 17 meeting, the board noted that a significant number of the comment letters were form letters that referred to a letter from the Tax Executives Institute. At the same time, FASB staffer Rich Paul said during the meeting, “A number [of letters] were from users of [financial] statements that did not recommend a delay.”

A FASB spokesman told that while the board considered all of the views expressed in the comment letters, it “overall believed there were not significant enough reasons for a delay, and that the standard – which was established in June of 2006 – provided for appropriate implementation time.” Additionally, “The FASB firmly understands that change is often difficult, and sometimes requires additional processes and costs. However, we believe that FIN 48’s benefit to the capital markets, which fosters better and more transparent information to investors far outweighs these costs.”

During its meeting, the FASB board members responded to corporate complaints, specifically the difficulty of complying with FIN 48 in different tax jurisdictions. “Companies are required to stay on top [of taxes] to begin with,” said board member George Batavick. FASB chairman Robert Herz added: “Companies that file in many jurisdictions and tax regimes seem to have a good handle on it.”

Given the number of comment letters FASB received, many companies will be disappointed by the board’s decision.

“We are disappointed in FASB, and find it curious — at best, paradoxical — that the staff would say they have to look at the issue of finality, but still move ahead [with FIN 48],” says Timothy McCormally, the executive director of the Tax Executive Institute, a trade group representing 6,400 accountants, attorneys, and other tax professionals. Regarding the more than 400 comment letters received by FASB asking for a delay in implementing the rule, McCormally claims that the missives “speak volumes about the level of concern in the public company arena.”

McCormally told that TEI and its members are concerned about not having extra time to sort out the rule’s effect on financial statements, but they understand that they are “stuck with the rule that FASB has imposed … and will do their best,” said the TEI director. “The question I don’t have the answer to,” added McCormally, “is how does the number of letters compare to other issues the FASB has out for comment.”

During the meeting, the members emphasized the importance of the benefits from FIN 48. Herz noted that the FIN 48 project came into being at FASB because the Securities and Exchange Commission staff had concerns about the diverse practices in accounting for uncertain tax positions and the possibility of earnings management, given that taxes are part of the balance sheet and reported earnings. “There was a lot of concern that this area was extremely opaque and a little mystical,” said Herz.

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