By James Hamilton, J.D., LL.M.
The FIN 48 approach to accounting for uncertainty has been the subject of considerable discussion and controversy. Effective for fiscal years beginning after December 15, 2006, FIN 48 requires companies to assess their tax positions to determine whether they are more likely than not to be sustained upon IRS examination. Ultimately, the FIN disclosure appears in the company’s financial statements.
FIN 48 was written to clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109 on accounting for income taxes. It requires a company to determine whether a tax position, based on its technical merits, meets the more-likely-than-not recognition threshold that the position will be sustained by the IRS upon examination. This determination is based on the individual facts and circumstances of that position evaluated in light of all available evidence.
In a recent publication called Frontiers in Tax, KPMG provided some advice on FIN 48. The firm noted that a significant new requirement is the disclosure of tax positions for which it is reasonably likely that the total, unrecognized tax benefits will increase or decrease significantly within 12 months of the reporting date.
Tax authorities may well be interested in these disclosures, noted the firm, and Tax Directors should consider their disclosures carefully and test their view of their anticipated disclosures before the year end with their auditors.
The disclosures under FIN 48 might also arouse regulatory interest if subsequent changes in recognized benefits greatly exceed previous estimates of reasonably possible changes. Such differences may cast doubt on the transparency of the earlier disclosure and the adequacy of the systems and controls supporting their preparation.
In the view of KPMG, the role of Tax Directors in addressing FIN 48 is to craft a system that fosters compliance, but is practical and can be implemented and understood by their tax reporting teams. FIN 48 is an important interpretation of one aspect of one accounting standard in one of the GAAPs that affect the group and its requirements should be integrated with a company’s overall reporting system.