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Evaluating Uncertain Position
February 10, 2010
Dr. Steve Grice
The guidance related to the evaluation of uncertain tax positions resides in FASB Accounting Standards Codification (FASB ASC) Topic 740. Many will recall that in 2006 the FASB issued FIN 48, entitled Accounting for Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109, entitled Accounting for Income Taxes. Through the interpretive guidance, the FASB clarifies the accounting for uncertainty in income taxes, provides recognition and measurement guidance related to accounting for income taxes, and provides guidance related to classification and disclosure of income tax related financial statement components. Fundamentally, FIN 48 incorporates a “two-step process” related to evaluating uncertain tax positions. In the first step of the process, reporting entities must evaluate the “recognition threshold” to determine whether it is more-likely-than-not that a tax position will be sustained upon examination (including resolution of any related appeals, litigation processes, etc.). This evaluation should be based on the technical merits of a tax position. Within this first step, reporting entities should presume that a tax position will be examined by the appropriate taxing authority having full knowledge of all relevant information. In the second step of the process, reporting entities must evaluate the “measurement issue” through calculating the amount of any tax position to be recognized in the financial statements. This measurement should be based on the largest amount associated with the position that is greater than 50% likely to be realized upon ultimate settlement.
Effective Date Not Deferred Again
The FASB subsequently deferred the effective date of FIN No. 48 for certain nonpublic entities to fiscal years beginning after December 15, 2008 while they considered whether the provisions within FIN 48 should be applicable for private companies in the same manner that the provisions are required to be applicable for public companies. In September 2009, the FASB released the much-anticipated guidance associated with implementing FIN 48 for private entities in Accounting Standards Update (ASU) 2009-06, entitled Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. Importantly, ASU 2009-6 did not extend the deferral of FIN No. 48, thus, this guidance is effective for fiscal periods beginning after December 15, 2008.
The guidance in ASU 2009-06 indicates how the general principles on tax positions, tax attribution, and scope of financial statements of a group of related entities apply to PTEs and NFP organizations. The overriding principle in the guidance is that all entities are subject to FASB ASC Topic 740, even if the only tax position in question is the tax status of the reporting entity. In addition, even in circumstances where it is more-likely-than-not that reporting entity status as a PTE or NFP organization would be sustained upon examination, it is important to understand that the reporting entity may have other tax positions to consider that are within the scope of FASB ASC Topic 740. The guidance in ASU 2009-06 makes it clear that the determination of the tax status of the reporting entity, including its status as a PTE or a tax-exempt NFP organization is a tax position subject to the accounting requirements related to uncertain tax positions.
Changes to Required Disclosures
ASU 2009-6 also eliminated the previously-existing “roadmap” disclosures that were troubling to many nonissuers (private companies) so that the disclosure requirements for these entities are not as robust as the requirements for issuers (public companies). Specifically, private entities will not be subject to the “full” disclosures in FASB ASC Topic 740 related to the following items that need to be disclosed by issuers:
· A tabular reconciliation of the total amounts of unrecognized tax positions at the beginning and end of the period, which is required to include [at a minimum] –
o The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period.
o The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the current period.
o The amounts of decreases in the unrecognized tax benefits related to settlements with taxing authorities.
o Reductions in unrecognized tax benefits resulting from a lapse of the applicable statute of limitations.
· The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
Hopefully the information provided above provides some insights into applying the provisions of ASC Topic 740. The above guidance is not all inclusive, thus, practitioners should carefully review ASC Topic 740 when implementing this guidance.