|By Wiggins, Casper|
Lessons from the First Five Years
Released in 2006, FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 [Accounting Standards Codification (ASC) 740-10], specifies the accounting and reporting requirements for an entity's uncertain tax positions. Such tax uncertainty arises because of the difficulty in applying ambiguous tax laws to a set of specific circumstances. FIN 48 was prompted by 1) concerns that the diversity in practice regarding uncertain tax positions was resulting in a lack of comparability in the reporting of income tax assets and liabilities, and 2) a desire for increased transparency through formal recognition of the previously unreported income tax reserves maintained by companies. It was assumed that the FIN 48 requirements would improve the disclosure of uncertain tax liabilities and would have a significant-but perhaps unfavorable-impact on financial reporting for many adopting firms.
This study focused on the long-term effects of FIN 48 and investigated the first five years (2007-2011) of FIN 48 reporting for Standard and Poor's (S&P) 100 firms. (The S&P 100 is a subset of the S&P 500 that represents approximately 45% of the maiket capitalization of the U.S. equity market.) Similar to prior research, it found that the FIN 48 cumulative effect adjustment at adoption was insignificant for most companies. It also found that unrecognized tax benefit (UTB) balances, on average, have been slowly rising over time (e.g., UTB balances rose in 2007 for many companies); however, they tend to be small and relatively stable when compared to stockholders' equity and other key financial variables. In addition, there is evidence of industry differences in UTB balances over the five-year observation period. Finally, the authors found that annual average UTB decreases due to prior positions consistently outweighed annual average increases related to prior positions, perhaps indicating a systematic overestimation of tax reserves under FIN 48. These findings provide a long-term perspective on FIN 48 accounting practice that should be helpful to CPAs preparing FIN 48 disclosures.
ASC Topic 740, "Income Taxes" [which superseded Statement of Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes] provides companies with a framework for measuring and disclosing the effects of income taxes on U.S. GAAP-based financial statements; however, it offers limited guidance on the recognition and measurement of uncertain tax positions. As a result, prior to the release of FIN 48, many companies recognized uncertain tax positions using the provisions of SFAS 5, Accounting for Contingencies.
A tax position is a stance taken by an entity in a tax return (or expected to be taken in a future return) that is used when measuring current income taxes, deferred income tax assets, or deferred income tax liabilities. Uncertain tax positions arise because companies do not know what the eventual tax liability will be upon review by the
Under FIN 48, the recognition of an uncertain tax position requires meeting a "more likely than nof ' threshold, meaning that there is more than a 50% likelihood that the position will be sustained if examined by a tax authority. Once an uncertain position meets the recognition threshold, measurement is defined as the largest amount of tax benefit with more likely than not probability of being realized upon settlement. UTBs associated with uncertain positions result in a reduction in tax refunds receivable or deferred tax assets (or in an increase in taxes payable or deferred tax liabilities), and thereby an increase in income tax expense reported in the current year.