The Financial Accounting Standards Board (FASB) issued interpretation 48 (FIN 48) in June 2006 with effective dates for public companies of fiscal years beginning after December 15, 2006 and private companies, including exempt organizations, of fiscal years beginning after December 15, 2007. FIN 48 was titled “Accounting for Uncertainty in Income Taxes.” The intended purpose of issuing this interpretation was to provide for more consistent recognition, measurement, and reporting of income tax positions between reporting entities.
In January, 2012, the Financial Accounting Foundation (FAF) released its “Post-Implementation review Report” on FASB FIN 48. The purpose of the review was to look at whether the stated purpose of the interpretation was being met and analyze cost/benefit of implementation and compliance in addition to recommending process improvements to the FASB in its standard setting process.
Certain findings from the review are as follows:
- Disclosure regarding tax uncertainties has improved subsequent to implementation;
- Investors are using the information as they consider cash flows and tax strategies;
- Uncertain tax positions are more consistently being communicated but, due to the significance of judgment and tax code complexity, comparability of disclosures is still difficult;
- Reported information is more relevant but cash flow implications are unclear since the recognized liability is not necessarily the amount to be settled;
- The benefits of improved consistency and reporting outweigh the costs of compliance.
Recommendations to the FASB regarding the standard setting process include improving user input in the deliberation phase, enhanced disclosures regarding the need for the guidance, cost/benefit, and intended interested parties.
This FIN 48 review was the first conducted by the FAF and will hopefully enhance the standard setting process and allow for a clear understanding of not only new standards but the extensive process that is undertaken before a standard is issued.
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