The Financial Accounting Standards Board’s tax-reporting rule on accounting for uncertainty in income taxes is creating some uncertainty of its own among corporate-finance departments.
Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, spells out how FASB wants companies to display information about tax benefits they are reporting on their balance sheets that might not pass muster with tax authorities. It requires companies to put a total dollar figure on the amount of tax benefit that they expect from such positions and to make some footnote disclosures about the nature of their uncertainties. Companies can show a tax benefit on the balance sheet if it’s “more likely than not” to pass review—that is, if they are at least 51 percent certain they will win the tax benefit.
The problem, accounting experts say, is the vast number of overseas tax jurisdictions where judging the certainty of some tax strategy is little more than a guessing game.
Bua
“It’s a headache in general, but the more international you are, the more of a headache it becomes,” says Jean Bua, chief accounting officer at American Tower, a maker of wireless and broadcast equipment. “The more emerging countries you’re in where tax laws aren’t as vetted, the harder it will be— harder because you’re relying on practices which may not have a tax or legal ruling behind them.”
FASB approved FIN 48 last July, and it went into effect for fiscal years beginning after Dec. 15, 2006. Corporate America has not been thrilled with FIN 48 from the start, and some companies mounted a fierce, last-minute campaign to delay the rule’s effective date for another year, but last week FASB voted to stick with the original date.
Bua says the new interpretation requires “a mindset shift.”
“There’s a much more regulated approach in FIN 48,” she says. “You have to look at everything you’ve done from the inception of time in your taxes to figure out how account for that in your reserves going forward.”
A common criticism of FIN 48 is that it provides a roadmap for taxing jurisdictions. Bua, however, says the biggest issue American Tower faces in applying FIN 48 has been in the international realm.
“The question is, ‘In a formula-driven pronouncement when you have tax jurisdictions that aren’t as mature in their tax code, how do you apply FIN 48?’” she says. “I wonder whether conservatism will take over correctness.”
“In the U.S., you know the tax law very well,” she says. “You know that the cases are rules based on tax law. In international jurisdictions where the laws aren’t as codified and where business practices sometimes circumvent the law, you’re not on as solid ground.”
Kimmelfield
Neil Kimmelfield, of the law firm Lane Powell, cautions that companies applying FIN 48 may require more and differing levels of outside tax opinions to justify the decision to recognize a tax benefit. He says auditors “are still figuring out what standard to hold companies to.”
Since nobody yet knows “how hard auditors are going to press,” he says, “there will be a lot of pressure to engage outside specialists for just about any judgmental question that might come up to satisfy auditors that the company has strong internal controls.”
Bringing In The Ringers
Auditors admit they don’t necessarily know how they’re going to digest all the implications of FIN 48 either. Even mid-sized audit firms might find some clients that rely on overseas operations (say, a manufacturing plant in China), so the auditor must get a firm grip on the tax laws in those locales.
Brad Muniz, director of accounting and auditing at the audit firm Sobel & Co., says the lack of clarity around tax laws will make that understanding difficult, and “even if there's a formal taxing structure, smaller [auditing] firms might not have the sophistication to handle those types of tax issues.”
Fagan
And Mark Fagan, a partner with the auditing firm Citrin Cooperman & Co., says FIN 48 compliance for global companies essentially “requires hands-on experience working with the local taxing authorities. In these cases, the principal auditor must work with a local firm accounting firm in that country.” He gives the example that most tax disputes in the United States are settled rather than go to trial; that might not be the case in other nations, and the auditing firm will need partners with local knowledge of tax-dispute practices to understand how they will fit into a company’s overall FIN 48 compliance.
Kimmelfield at Lane Powell also stresses that the nature of the opinions needed to satisfy FIN 48 are different from those that satisfy the IRS. FIN 48 requires companies to show tax benefits on the balance sheet only if they deem those positions as “more likely than not” able to endure Internal Revenue Service scrutiny.
Tax law, however, allows companies to take a position on the tax return that has as little as 30 to 40 percent likelihood of standing up to a challenge without incurring a penalty. FIN 48 prods companies to illuminate that chasm of uncertainty with more balance sheet disclosures.
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