Update: FASB Says FIN 48 To Proceed As Planned

IMPORTANT UPDATE

FASB has unanimously voted not to delay the effective date of FIN 48, a controversial accounting rule that requires companies to assess all uncertain tax positions. The Board will issue new guidance soon to help companies understand their disclosure requirements under the new rule. Compliance Week will cover this issue extensively in its next edition; last week's coverage of the impending meeting can be found below:

Last Week's Coverage Begins Here:

The Financial Accounting Standards Board plans to discuss this week whether it should delay unpopular new accounting guidance that requires companies to disclose where they may have doubts about their tax positions, swayed by hundreds of unsolicited comment letters expressing dismay with the rule.

The Securities and Exchange Commission has already given leeway to the mutual fund industry on the same rule, acknowledging that funds may have more work and tighter timelines to implement the new guidance. In a recent letter to the Investment Company Institute, an association of investment companies, Chief Accountant Conrad Hewitt said the SEC “would not object” if funds implement the new rule in stages as outlined in the letter (see box at right).

The rule at issue is Financial Interpretation No. 48, Uncertain Tax Positions, which took effect for fiscal years beginning after Dec. 15, 2006. FIN 48 requires companies to take a fresh look at outstanding tax issues with tax authorities and report them in their financial statements with a new level of candor about whether they might ultimately be upheld or rejected.

Last week FASB suddenly slotted 30 minutes on its agenda for Jan. 17’s regular weekly meeting to discuss whether it should delay FIN 48’s effective date. While companies would not need to make full disclosure about their tax positions until annual reports released in early 2008, they do need to start making some FIN 48 disclosures in periodic reports as early as this spring—a task many experts say companies are woefully unprepared to do.

Under FIN 48, companies must assess each outstanding tax position as it proceeds through reporting to tax authorities and, for any position less than 51 percent likely to be approved, to establish a percentage of likelihood that the position will survive any challenge mounted by tax authorities.

Bernard

David Bernard, president of the Tax Executives International, an association of tax professionals, says the group was flooded with triple the expected audience at a November education session addressing FIN 48. “We received much feedback from our membership about the complexity of FIN 48 and the heavy burden that implementation would place on them,” he says.

Bernard says FASB representatives addressing TEI sessions told the group that no such concerns were expressed to FASB’s Norwalk, Conn., headquarters. That prompted TEI to launch a letter-writing campaign, and by late last week, FASB had received 259 letters, the vast majority of which call for a delay in the effective date of FIN 48.

In his letter to FASB, Bernard described the scope of the work necessary to comply with FIN 48: “Financial statement issuers must analyze their entire inventory of tax positions—claimed and unclaimed—in every jurisdiction, for every taxing authority, and for every open tax year in order to understand and document the company’s position at the effective date.” He compares the work to re-filing an income tax return in every jurisdiction for every open tax year.

“The five or six months between adoption and the effective date is simply not enough for corporate tax staffs to develop a working understanding of the new rules and perform the required analysis, all on top of their daily demands of tax compliance, tax audits, and providing tax advice to their employers,” Bernard tells Compliance Week. “This demand on external resources is exacerbated by the fact that the outside professional tax community is already spread too thin.”

“The five or six months between adoption and the effective date is simply not enough for corporate tax staffs to develop a working understanding of the new rules and perform the required analysis, all on top of their daily demands of tax compliance, tax audits, and providing tax advice to their employers.”

— David Bernard, President, Tax Executives International

FASB originally sought an effective date for FIN 48 of one year earlier, but didn’t finalize the interpretation until July 13, 2006. “The Board concluded that because of the number of tax positions taken in prior periods that are anticipated to be re-examined by preparers when this interpretation is adopted, sufficient time should be provided to evaluate those prior positions,” the Board wrote in its final interpretation. “During redeliberations, respondents requested a later effective date to complete their assessments of current and prior years’ tax positions. Based on discussions with constituents, the Board decided that a period of six to nine months would be sufficient to apply this interpretation.”

Nebergall

Mark Nebergall, president of the Software Finance and Tax Executives Council, says his decision to request a delay was not prompted by TEI’s campaign. “The fact that FASB has the matter on their agenda for next week’s meeting at least suggests that they will give the matter serious consideration,” he says. “I hope they are not just holding a hearing so that they can’t later be accused of ignoring the request for a delay.”

On behalf of fund companies, the Investment Company Institute asked FASB and the SEC to consider the net asset value calculation funds must perform beginning with the opening of a financial period and its impact on the tax analysis. Hewitt acknowledged in his letter to the ICI that the net asset value computation complicates adoption of FIN 48 for those companies and he mapped out a staged implementation of FIN 48 to accommodate it.

Jack Ciesielski, president of R.G. Associates and a member of FASB’s Emerging Issues Task Force, sent a letter to FASB as well, one of only a few urging that the effective date remain untouched.

“I believe that the adoption of FIN 48 could entail significant work by firms, but it should not be a surprise to them,” he wrote. “The interpretation project started about two-and-a-half years ago ... There has been ample time for firms to understand that FIN 48 was going to change business as usual, and to prepare for implementing the standard.”

The agenda for FASB's next meeting, plus additional FIN 48 requirements, guidance and coverage, can be found in the box above, right.