FIN 48 In Effect, But Help Is Coming

The Financial Accounting Standards Board will stand firm on its plans to enforce the effective date of new tax-related reporting rules, although it has promised more guidance on the tricky subject—and stressed that the Board is not looking for exhaustive documentation of the obvious.

FASB met last week to answer the 11th hour request for a delay in the effective date of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes. In a flood of more than 400 complaint letters sent to the Board recently, companies said FIN 48’s implementation is confused, behind schedule, and beset by conflict over how much documentation is necessary to comply.

The staff analyzed the unsolicited comment letters—which largely asked for a one-year deferral of the Dec. 15, 2006, effective date—and determined that most of the issues raised had been addressed in the original deliberation process or could be answered via the Board’s technical inquiry process. The staff recommended, and the Board unanimously agreed, to stick to the original implementation timeline.

FIN 48 requires companies to analyze all outstanding tax positions and show them on the balance sheet only to the extent that they might be upheld and recognized by the relevant taxing authority. It compels some frank disclosure about where companies may have uncertainties about the tax positions they’ve taken, sparking heated debate over the blueprint it creates for tax authorities prowling around for questionable tax strategies.

Seidman

“None of the issues raised are of such significance that they would warrant a deferral on our part,” board member Leslie Seidman said at the meeting. “In applying current GAAP, an entity needs to have evaluated [its] tax positions either for accounting purposes or for disclosure purposes. I accept that we have through this standard changed the threshold for recognition and potentially the approach to measurement for tax positions, and that will require some level of work. However, the changes we made to the accounting model were responsive to the comment letters and, through redeliberations, we have already deferred the effective date.”

Chairman Robert Herz was equally unsympathetic to the calls for delay. “This was issued in July,” he said. “It’s already been six months, and people have until the end of this quarter. The SEC specifically asked us to consider taking on a project in this area because the area lent itself to potential earnings management, there was diversity in practice and lot of concern by investors … There’s a lot of concern that this has been extremely opaque and a little mystical.”

Herz

While holding firm on the effective date, the staff and the Board conceded that they should clarify what they mean by “ultimate settlement” to help companies that are confused or arguing with their auditors over how long to hold an uncertain position under review. The Board has promised to turn out new guidance that will help companies out of that maze.

The interpretation also has sparked debate over how much documentation a company must produce to demonstrate its confidence in tried-and-true tax positions, and how long a company must keep an uncertain position under the microscope after the position has been defended through a tax audit or a court challenge, for example.

Batavick

FASB member George Batavick said the Board hadn’t heard about extensive implementation problems in the first five months after FIN 48 was issued in mid-July. He noted that those questions have been addressed as they were raised.

Seidman said the Board should answer questions about how a company should determine when a tax position is “ultimately settled” and therefore no longer in need of examination through the FIN 48 lens.

“I can see how companies could perceive there to be different thresholds,” she said. Paragraphs 8 and 10 of FIN 48 seem to convey “some degree of finality,” she said, while Paragraph 12 suggests that management should follow a facts-and-circumstances analysis.

“I think we could take some of the confusion out of this situation to clarify the relationship between those paragraphs,” she said. “It’s important for us to do this quickly so companies have a view on how to proceed with transition.”

Other board members were skeptical about whether additional guidance will help with implementation. “I believe whatever guidance we come out with will continue to be a facts-and-circumstances determination,” board member Ed Trott said. “If we can provide general guidance that helps that determination beyond what we’ve expressed already, I’ll certainly consider it.”

Further Assistance

FASB also took the opportunity of the public meeting to clarify that FIN 48 does not require extensive documentation of highly certain tax positions. The staff noted that members of the Securities and Exchange Commission staff have said in public speeches recently that companies do not need to provide supporting documentation for every last tax position.

Seidman suggested that the meeting’s minutes underscore that point and that the FASB staff should assure that the Public Company Accounting Oversight Board is on the same page as well.

“FASB’s discussion said this is a principles-based pronouncement, so the normal principles including those with respect to materiality should be applied … But if your accounting firm isn’t clear with you on how they’re going to apply that, it puts you in a difficult position.”

— Tracy Hollingsworth, Vice President Of Finance, Manufacturers Alliance/MAPI

Hollingsworth

Tracy Hollingsworth, vice president of finance for the Manufacturers Alliance/MAPI, is disappointed with FASB’s decision to reject the delay request, and says some in Corporate America doubt whether FASB’s plan to issue guidance on ultimate settlement will be adequate.

“That’s only a part of the problem that companies are having,” she says. “There are still scope issues. If a company does business normally in 30 countries, but sometime in the last 10 years has been into another 30 countries, do you have to evaluate whether those countries might assert that you had a permanent establishment there seven or eight years ago?”

Hollingsworth says companies still worry about materiality as well. “FASB’s discussion said this is a principles-based pronouncement, so the normal principles including those with respect to materiality should be applied,” she says. “But if your accounting firm isn’t clear with you on how they’re going to apply that, it puts you in a difficult position.”

As for the extent of documentation required for highly certain positions, Hollingsworth isn’t certain that FASB’s call for minimalism will be heeded by auditors, who are under the constant gaze of the PCAOB to assure that they have adequate evidence to support audit conclusions.

“Some of our members have said very extensive documentation will be required,” she s says. “They’re worried about being second-guessed and having that second guessing become a (Sarbanes-Oxley) 404 issue.”

McCormally

Timothy McCormally, executive director of the Tax Executives Institute—which led the letter-writing campaign calling for a FIN 48 delay—says the documentation instruction may help companies now churning through positions that have already been taken, but does little to address how companies should establish SOX-compliant processes going forward to characterize any uncertainty surrounding future positions.

“Early in the process you want to assure you capture information that will determine if a position is certain or uncertain,” he says. “How much does it take to set up that process, or set up three processes: one for those that are certain, one for those that are uncertain, and one for those in the middle?”

McCormally says the TEI will advise its members to continue to document and contact FASB with any ongoing implementation problems, to address the concern board members raised that they had not heard until recently that companies were having problems.

He says the TEI will be grateful for any new guidance FASB has to offer to the market as a whole, but also wonders whether it will fully address the scope of the problem. “We won’t know for some months really when you start to see if there’s divergence of interpretation playing out in financial statements companies are filing,” he says. “The concerns continue, but we don’t have the option to pick up our dolls and dishes and go home. We have to go forward and implement.”