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Overview of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. In June, 2006, the Financial Accounting Standards Board (FASB) issued interpretation No. 48 - Accounting for Uncertainty in Income Taxes (FIN48). FIN 48 calls for the recognition and measurement of all tax positions taken or expected to be taken by all U.S. companies. It is effective for fiscal years beginning after December 15, 2006. Because FIN 48 applies to all tax positions the impact to corporations is significant and requires additional tracking and documentation from every entity and location. FIN 48 is intended to address the varied accounting practices that have arisen from the subjective interpretation of the tax law by providing a consistent approach and criteria for the evaluation, recognition and measurement of the tax benefit related to tax positions. As a result, tax departments must document and track tax positions in a new, more detailed manner which requires process changes, new controls, and new reporting. Further, FIN 48 increases the importance of managing tax authority examinations in a methodical, predictable, and controllable manner to ensure that the positions, evidence, and responses to examinations remain consistent. FIN 48 requires companies to determine whether or not a tax position will be sustained upon examination by the taxing authority. Upon completing this "more likely than not" assessment on each position taken, companies are required to determine the amount of benefit to recognize in the financial statements. Any differences between tax positions taken in a tax return and amounts recognized in the financial statements will result in an increase in liability for income taxes payable (or reduce income tax refunds receivable) and/or reduce the company's deferred tax assets or increase their deferred tax liabilities. The accounting for all material positions taken (or expected to be taken) on any income tax return is governed by FIN 48. Income tax returns include those that were filed or that should have been filed with local, state, federal, and international taxing authorities. FIN 48 also significantly changes the treatment of positions that have only timing consequences, such as positions involving depreciation. Although these positions generally do not affect the aggregate amount of taxes payable over time, they generate an economic benefit by delaying the payment of taxes. FIN 48 now requires an analysis of all timing positions as well (on each reporting date) and prescribes separate reporting based on the sustainable book/tax difference pursuant to FIN 48’s recognition and measurement model. The Interpretation is a challenging pronouncement with major implications for financial reporting, United States Securities and Exchange Commission (SEC) filings, and internal controls. Under the Interpretation, tax positions must be:
The required documentation and analyses are also subject to the strict internal control standards required under the Sarbanes – Oxley Act (SOX).
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