FIN 48: Slouching Toward Implementation

From AAO Weblog

Last June, the FASB released an interpretation of Statement No. 109, which deals with income tax accounting. It was called Interpretation No. 48 (catchy, eh?), “Accounting for Uncertainty in Income Taxes” and quickly picked up the moniker “FIN 48.” Or, if you work in the tax department of a publicly-traded company, it became known by other, more colorful nicknames. I won’t go into those here; family publication and all that.

And I won’t go into details about the nuances of FIN 48, either; suffice it to say, it provides a framework for evaluating “uncertain tax positions” that companies take from time to time, that might either create/increase a tax asset or reduce a tax burden. Sometimes those tax positions are solidly defensible, and there’s little question that any tax assets recognized in the financial statements are going to be realized; sometimes the positions taken on tax returns are done so with fingers crossed in the hope that the taxing authorities are going to miss them. Any effect that “fingers crossed” positions may have on the financial statements – creation/increase in assets or reduction in liabilities – might be different from what shareholders (after it’s been asserted in the financial statements that these things are so.)

In studying balance sheets, investors want to see what is – not what managers wish for. And that’s what the effect of applying FIN 48 does: it forces managers to look at the odds of open tax positions being sustained under review by tax authorities. The standard might wring some water out of assets on balance sheets … IF it’s actually implemented. It’s supposed to be effective in years beginning after December 15, 2006. For calendar year companies, that’s right now.

Recently, the FASB has started receiving unsolicited letters about the interpretation, insisting that the standard-setter push back the implementation date – for example, this one from Tax Executives International. This is a standard that has gestated for over two years, has been exposed for comment, and issued in final form six months before implementation – and now firms decide that it’s too soon to implement it? Even more ironic, the IRS had even offered expedited reviews of issues with FIN 48 importance in order to enable them to meet the implementation deadline.

I’ve written a letter of my own to the FASB, urging them to stand pat on the implementation date. Feel free to send one of your own to FASB chairman Robert Herz, using this link. Tell him that you support their standard as it stands.

http://www.accountingobserver.com/blog/