The Financial Accounting Standards Board has published its proposed guidance on what it means by a “settled” tax position in Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which requires companies to begin showing more clearly on financial statements where they have tax positions that may not hold up under IRS scrutiny.
FASB says a position is considered settled—and therefore certain for purposes of applying FIN 48—“if the taxing authority has completed all of its required or expected examination procedures, the enterprise does not intend to appeal or litigate any aspects of the tax position, and it is considered highly unlikely that the taxing authority would re-examine the tax position.”
FASB says a tax position need not be directly examined by the tax agency in question to be considered settled. Rather, if the tax agency has reviewed the position and taken no action on the entire tax year, the company can consider a specific position within that tax year to be settled, as long as the other conditions apply as well.
The concept of settlement surfaced as needing clarification, the Board said, when FASB received more than 400 unsolicited comment letters as FIN 48 was taking effect, calling for a one-year delay in implementation. FIN 48 took effect for calendar year companies at the start of 2007.
Companies said the implementation of FIN 48 was generally behind schedule and fraught with confusion, including differing interpretations of when a tax position is settled and no longer in need of analysis for financial reporting purposes. Companies said different interpretations focused on examinations or audits by taxing authorities, possible outcomes of court proceedings, and the statute of limitations as prospective benchmarks for when a tax position is finally resolved.
FASB was generally unsympathetic to that last-minute call for delay, saying companies had been given adequate time to prepare for implementation, but the Board also promised to give more explicit direction about when a company can consider a tax position to be ultimately settled.
Board member Ed Trott dissented from the Board’s view during its public deliberation, and the draft guidance contains an alternative view provided by an unnamed board member.
Trott
“This board member does not believe that the proposed guidance with respect to the term ‘effectively settled’ is appropriate,” the draft staff position says. “Using the ‘closing of a tax year’ as a basis on which to treat a position as settled, when a taxing authority has the ability to reopen and examine additional positions, inappropriately allows unexamined positions to be treated as ‘effectively settled.’”
Jeff Rasmussen, tax counsel with the Tax Executives Institute, says the proposed guidance seems to clarify where unrecognized tax positions can ultimately be recognized. “Overall, the guidance doesn’t reduce the burden of complying with FIN 48, but it changes how you evaluate how much of the unrecognized tax positions you can recognize,” he says. “It doesn’t reduce the scope of work or the scope of analysis that you have to do.”
Rasmussen
Rasmussen says companies likely will be grateful that the alternate view expressed in the proposed staff position was not the majority view. “It would have been more stringent,” he says. “It would have required a more granular analysis. It would not have solved the conundrum of what to do with unexamined tax positions.”
Comments on the proposed staff position are due March 28. The draft can be found in the box above, right, as can recent Compliance Week coverage of the FIN 48 transition.
U.S. GAAP Needs Emissions-Trading Rules, FASB Agrees
FASB is planning to start a new project to determine how companies should be required to account for environmental-emission allowances they may buy and sell with other companies.
As a means of controlling pollution, governments around the world assign caps on various pollutants that companies may emit as a result of their operations without violating environmental standards. A market now is developing, especially in Europe, for companies to buy and sell their emissions allowances, says Greg Rogers, an environmental attorney and president of Advanced Environmental Dimensions.
Rogers
Because the market concept is still in its infancy in the United States, no accounting standards exist to govern how companies should account for the trading of emissions allowances, Rogers says. “We do need a standard on this,” he contends. “There’s no consistency on it. Some companies are more transparent than others. Some just tell the net effect of their trades. That’s going to be an interesting policy call.”
Rogers says the need for accounting standards will become more acute if the United States follows suit with the European Union and other nations that have set caps for greenhouse gas emissions. In Europe, companies that can meet their allowances or can make capital improvements to reduce their emissions sell their allowances to companies that are unable to meet their own assigned allowances, he says. Such trading currently takes place in the United States on a limited basis for certain pollutants, but the market is narrow and small at the moment.
FASB expects the market to grow and wants to address the lack of rules within U.S. Generally Accepted Accounting Principles to govern their accounting. FASB’s staff said in a handout to the Board that the only accounting guidance available is contained in the Federal Energy Regulatory Commission’s Uniform System of Accounts. FASB staff say most U.S. companies recognize emission allowances at historical cost, but some treat allowances as an intangible asset.
Crooch
FASB agreed in a recent board meeting to develop comprehensive guidance that would address asset recognition, measurement and impairment, revenue recognition, cost allocation, liability recognition, presentation, and disclosures. They don’t necessarily expect it to be a simple undertaking.
“The topic is going to grow in importance, so we should give some comfort to the people who are trying to do the accounting for these things,” FASB member Michael Crooch says. “I don’t have any hope that it’s going to be an easy topic. I see that a company is granted these emissions rights on this date to cover pollution that is going to happen at a later date. It’s an asset at one point in time and a liability to be relieved by that asset to occur at a later period. The bookkeeper in me believes there’s going to be some angst going on.”
Related FASB meeting handouts on the topic can be found in the box above, right.
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