FASB Offers More Help on Tax Puzzler

Companies continue to question FIN 48's accounting for "uncertain tax positions," but critics scoff, saying their head-scratching is just a stall t...
Helen ShawMarch 9, 2007

Just as a new standard on accounting for uncertain income taxes becomes effective, there’s more guidance on the subject from the Financial Accounting Standards Board.

FASB has issued a proposed staff position to amend FASB Interpretation No. 48, accounting for uncertainty in income taxes, and define the phrase “ultimate settlement”; that is, the point when firms can be assured they have completed accounting for the uncertainty in their tax positions.

The proposed FASB staff position clarifies that a tax position could be effectively settled upon an exam by a tax authority, yet it admits that such an assessment is up to a firm’s judgment. In addition, a position is settled when a company doesn’t intend to appeal or litigate it, and when “it is considered highly unlikely that the taxing authority would reexamine the tax position.” In other words, quips Jack Ciesielski, president of RG Associates, ultimate settlement is “when companies give up or when it’s determined that the tax authority has given up.”

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That guidance, and a delay of FIN 48, had been requested by many of the more than 400 companies and associations that sent comment letters to FASB starting in late 2006. While the accounting standards–setter refused to delay FIN 48, it did agree at its January 17 meeting to offer a better explanation of “ultimate settlement” in time to help companies comply with the standard. FIN 48 is effective for fiscal years beginning after December 15, 2006, which means that public companies will apply the standard when they report their first-quarter 2007 results. Comments to FASB on the proposed staff position are due by March 28.

“Companies didn’t exactly request it,” comments Ciesielski. “They were doing anything they could to stall implementation [of FIN 48].”

While FASB’s clarification will be helpful, companies will likely continue to ask for guidance as they begin to grapple with the practical application of FIN 48, says Daniel Meehan, tax partner at J.H. Cohn. The guidance “requires judgment, experience, and expertise,” he explains. For instance, under the settlement definition, the requirement for firms to assess when it’s “highly unlikely” a tax authority would reexamine a position “suggests you need to be an expert in the area,” says Meehan.

Given that accounting for uncertainty in taxes is complex, companies may send more calls for help, predicts Meehan: “I think we’ll see a lot more of this [guidance] than a lot less going forward.”

Yet Ciesielski is aghast that firms need specific definitions spelled out for them. The recently issued, 12-page FASB staff position “is about two words: ultimate settlement,” he says. “Can’t you guys figure that out yourselves?”

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