FIN 48: Sometimes The Glass Is Half-Full

From AAO Weblog

When FIN 48 starts popping up in 2007 financials, it’s reasonable to expect that it will result in charges being taken to wring water out of existing tax assets on balance sheets. If the tax benefits tied to the recorded tax assets aren’t “more than likely” of withstanding scrutiny by tax authorities, then they need to be written down to the amount which can be expected to be realized. That’s the largest amount of benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement. So, more aggressive tax policies that can’t hit that threshold should result in writedowns of tax assets, with charges to the income statement (in income tax provisions) as a result.

That’s what you’d expect, anyway. But there will be exceptions, and one of the earliest disclosures about upcoming FIN 48 effects is one of those.

Kraft Foods filed an 8-K on Monday and mentioned that in 2007, FIN 48 “will result in an increase to shareholders’ equity as of January 1, 2007 of approximately $200 million to $225 million.” A positive effect on stockholders’ equity – how can that be?

There’s a reasonable explanation for it, though it’s not clear from the Kraft filing. FIN 48 addressed a “diversity problem” in the application of accounting principles. Some firms applied a “probable” threshold for recognizing tax benefits from a tax strategy, rather than a “more likely than not” threshold. A probable threshold might be something like a 75% chance of a tax position being sustained under scrutiny by a tax authority. It’s plausible that Kraft may have held itself to this higher standard – then FIN 48 comes along with a “more likely than not” threshold. Other tax strategies that didn’t make the cut at Kraft before FIN 48 are now viable for recognition. So rather than restricting the recognition of tax assets, FIN 48 could make for new tax assets to be recognized at firms that had previously been tougher in their recognition. Don’t be surprised if there are more of these “half-full glasses” in the offing.

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