By William Prue, Director of Accounting and Auditing      

Private companies have received a temporary reprieve on an accounting rule that changes the way they will be required to account for income taxes on financial statements.  The Financial Accounting Standards Board (FASB) voted to defer the effective date of FASB FIN No. 48, Accounting for Uncertainty in Income Taxes, for all private companies to periods beginning after Dec. 15, 2008.  This means calendar year companies will be required to adopt FIN 48 on their 2009 financial statements, rather than 2008. 

FIN 48 has already gone into effect for public companies for fiscal years beginning after Dec. 15, 2007. The standard establishes a "more likely than not" threshold for the reporting of uncertain tax positions on financial statements, but has already run into high costs and difficulties at public companies.

FIN 48 Background: 

The requirements of computing and reporting uncertain income tax positions under the guidelines of FIN 48 add to the already complex standards of FAS 109 “Accounting for Income Taxes”. The purpose of FAS 109 is to recognize (a) the amount of taxes payable or refundable for the current year and (b) the deferred tax liabilities and assets of future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. FIN 48 takes the principles of FAS 109 further by requiring additional computations, documentation, and disclosures of a company’s individual tax exposures in the financial statements. FIN 48 is intended to reduce inconsistencies and increase the relevance and comparability in the application of the accounting rules related to income tax contingencies.

FIN 48 applies to all entities that prepare financial statements in accordance with GAAP with the potential to be subject to income tax. This includes both pass-through and not-for-profit entities that may be subject to state and local taxation or not-for profits subject to unrelated business income as well as the possibility of having done something to jeopardize their tax-exempt status.

The delay is viewed as a positive relief for most private companies because it affords more time to prepare. The adoption of FIN 48 by a private company will allow for a fresh look at its tax exposures and to evaluate tax planning implemented in the past so that a company can execute the appropriate steps to minimize risk in the future. 

Private companies can benefit from the experiences of public companies that were required to implement FIN 48. The process can be cumbersome and some public companies are still struggling with the implementation. It is important to start the process early. FIN 48 allows for any initial adjustments to be reflected in the opening balance sheet without an adjustment to the income statement. However, for all subsequent years beyond the initial year of adoption, adjustments as a result of the FIN 48 analysis must be reflected in the income statement. Per-forming a thorough analysis in the initial year may minimize unwanted outcomes affecting earnings in future years.

The implementation of FIN 48 for private companies has only been delayed and will not go away.  Under the guidelines of FIN 48, companies are required to inventory all previous and current tax positions that are still subject to audit within the statute of limitations.  The next step is to evaluate each position on the uncertainty and whether each position individually satisfies a more-likely than not threshold (greater than 50%) of sustainability at the full amount during an examination. After the level of uncertainty is determined, a rather complex subjective computation is required to determine the materiality of the uncertainty, financial statement impact, and potential disclosure within the financial statements presented under GAAP.

The ideal next step for a private company is to coordinate a plan of action with their tax advisors to implement FIN 48. Planning early may enable changes to be made in the filing of 2008 tax returns thereby minimizing the amount of uncertainty of income tax positions required to be disclosed.  The best way for a private company to take advantage of the delay is to be proactive and start the FIN 48 process early.

• Decision to not file a tax return (it is important to note that the statute never closes on a return not filed).
• Credits (such as foreign tax credit or research & development credit)
• State and local nexus issues
• International issues (such as transfer pricing)
• Revenue recognition policies
• Timing of deductions
• Complications inherent in mergers & acquisitions or restructuring
• Inappropriate valuations
• Poor documentation to support positions

The initial disclosures under FIN 48 for most private companies will be reported in the 2009 financial statements. However, in most cases, we recommend that the planning of FIN 48 engagements should be done much earlier. The timing and fees of a FIN 48 engagement will greatly depend on the history of the company, the complexity of the issues, and the documentation already in place.

There are concerns regarding the amount of disclosure in the financial statements and the use of the disclosures by the IRS to provide a roadmap for examinations. Currently, the IRS is taking the position of not requesting the workpapers that support the FIN 48 analysis during an examination. However, the IRS’s position is subject to change in the future.