The first formal post-implementation review of a rule written by the Financial Accounting Standards Board concludes that the rule works, but some stakeholders believe it could benefit from some improvement.

The Financial Accounting Foundation, FASB's overseer, completed its review of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – later codified in the Accounting Standards Codification under Topic 740, Incomes Taxes – to determine how well the rule is working in practice. FAF developed the review process to get feedback on the application, usefulness, and effectiveness of standards written by FASB. FAF has promised it will take what it has learned in its augural review and apply it to future reviews, although it has not yet determined which or how many standards to review going forward. “We are taking this step by step,” says FAF President Terri Polley.

The review concluded FASB's controversial standard – which it adopted in 2006 to require companies to be more candid about where they may have shakey tax positions planted in their financial statements – has in fact provided more information to investors about tax uncertainties, and investors are using that information in their decision-making. The review concluded uncertain tax positions are recognized and measured more consistently under FIN 48, but that it doesn't necessarily lead to more comparable information because reported amounts are steeped in judgment and tax code complexities. “Different judgments may result in different reported outcomes, even for similar uncertain income tax positions,” the report says.

FAF reviewers also concluded that reported information about income tax uncertainties is more relevant since FIN 48, but it may not be predictive of future cash flows. On balance, the reviewers concluded, the benefits of FIN 48's improved consistency and reporting of tax uncertainties have outweighed the cost of implementing the standard.

Going forward, FAF suggests FASB continue to work toward improved user input in the early stages of standard setting and include discussion in each new standard about the need for the guidance that is being adopted as well as the rationale for the chosen solution if the board selected from alternative approaches. FAF suggests FASB also include more detailed discussion around cost and benefits. Finally, FAF says FASB should follow consistently its established policies and procedures for sending proposed rules out for a second round of review and comment.

FAF isn't trying overstep FASB's independence, according to Polley, but she expects some kind of answer from FASB based on the contents of the report. "In several weeks, we anticipate they will issue some sort of response regarding what they would intend to do or consider doing based on the findings of this report," she says.

Polley says the completion of the FIN 48 review represents an important milestone, sending a signal that the trustees take seriously their responsibility to oversee FASB. “It shows our willingness to take a look at how FASB standards are working in the real world,” she says. “Some of the things we learned through this post-implementation review will show us how we can set standards better in the future.”

FIN 48 is one of a handful of standards that caused the long-standing controversy over how accounting standards apply to private companies to boil over, leading to the debate that rages today between FAF and the American Institute of Certified Public Accountants over how accounting rules apply, or should apply, to private companies. FAF has a proposal on the table to form a panel that would look at exceptions and differences for private companies subject to FASB's approval, but the AICPA is calling for an entirely new board with standard-setting authority dedicated to private company accounting standards.

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