Uncertain Tax Positions Rule Gets Thumbs Up

by Glen Shapiro, LawAndTax-News.com, New York

13 January 2012

A 2006 accounting standards interpretation intended to increase relevance and comparability in reporting information about income tax uncertainties generally achieves that purpose, although some stakeholders believe the standard could be improved.

That was the overall conclusion of the first formal "post-implementation review" of an accounting standard set by the Financial Accounting Standards Board (FASB) under a new review process established by the Financial Accounting Foundation (FAF). The FAF oversees the FASB and its sister standard setter, the Governmental Accounting Standards Board (GASB).

The review of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) (codified in Accounting Standards Codification Topic 740, Incomes Taxes), was undertaken by an independent FAF team working under the oversight of the FAF Board of Trustees. The team's formal report was issued on Thursday.

"The post-implementation review process is designed to obtain real-world feedback on the application, usefulness, and effectiveness of standards set by our Boards," said FAF Chairman John J. Brennan. "We are pleased with the review process -- and the amount, diversity, and quality of the stakeholder feedback we received during our inaugural project.

"That feedback indicated that FIN 48 generally is working as intended, although we note that some stakeholders have suggested that it could be improved. The review team's observations and recommendations, accompanied by stakeholders' valuable comments and suggestions, will further assist the FAF in improving the standard-setting process," Brennan said.

FASB Chairman Leslie F. Seidman said, "Post-implementation review is an important feedback loop in the standard-setting process. I believe that the report on FIN 48 affirms the overall effectiveness of the reporting requirements and the FASB's processes, while identifying suggestions for improvement. FASB members will consider the reported findings and provide a written response in the coming weeks."

Based on its research, the review team concluded that FIN 48 has resulted in more information about uncertain income tax positions being reported than had been the case before its implementation and that investors generally are using the improved information in their investment decision process.

The report also concluded that financial statement preparers are accounting for and reporting income tax uncertainties more consistently and such information is more relevant than it had been prior to FIN 48.

On the downside, preparers said that they are concerned that the judgments involved in accounting for income tax uncertainties result in information that is not comparable, and may not represent amounts expected to be paid. In addition, while preparers generally understand FIN 48's provisions and are able to apply them, they said that difficulties arise in making judgments about outcomes applied to complex, and often vague, tax codes and practices.

Some preparers, particularly those from smaller organizations also reported that they incurred significant costs such as additional audit fees, external legal and accounting expertise, and documenting existing tax positions as a result of FIN 48 implementation.

Recommended