Question

"Taxes"

Examine the impact of FIN 48 (Accounting for the Uncertainty in Income Taxes) on GAAP reporting. Identify the benefits of the requirements on financial reporting. Assess whether FIN 48 was necessary and support your position.

Answer 1

FIN 48 was released in 2006 for the accounting of uncertainty in the income taxes. It is called as interpretation of the FASB statement 109. It specifies the reporting and accounting requirement for the uncertain ax position of an entity. This type of uncertainty in tax arises due to the problem and complexity in applying uncertain tax laws to certain situations or circumstances. The income taxes provides a framework to the companies for measuring and then disclosing the effect of the taxes on the financial statement based on U.S GAAP. But, it provides confined guidelines for recognizing and measuring the position of uncertain tax. Thus, prior to FIN 48, most of the companies recognize position of uncertain tax using SFAS 5 provisions i.e. the accounting for contingencies. Under the SFAS 5, the business firm estimate the tax amount for which these firms were held liable and then charged the additional amount as the current year’s tax expense and thus it create a tax reserve. The introduction of FIN 48 in GAAP reporting outline the 2-step process for identifying and measuring the position of uncertain tax.

The FIN 48, conditions the reporting of the position of uncertain tax by stating that there should be greater than fifty percent likelihood that such position will be sustained when it is examined by the tax authority. When the position of uncertain tax meets the threshold limit then measurement will be the highest amount of tax benefit and not the probability of the amount being realized on settlement. UTBs related with the uncertain positions will result in the decline of tax refund receivable or the decline in DTA (Deferred tax asset) and thus the amount of current income tax will be increased.

The FIN 48 address both de-recognition and recognition of the position when the criteria of threshold limit are not met. It requires disclosure of gross UTBs including the tabular reconciliation of the amounts and also other details that pertains to UTBs. The desired impact on the reporting was to raise consistency in de-recognition, recognition and measurement, and also rising information about uncertainty in the income tax liabilities and assets. FIN 48 requires the business firm to record the adjustment for the cumulative effect to the stockholder’s equity during adoption.

The introduction of FIN 48 was important as it clarifies several aspects which are ambiguous while using SFAS 5. The aspects are as follows:

a). analysis is done at the account unit instead of aggregate unit.

b). the concept of more likely is applied in this level.

c). It is assumed that all the position of uncertain tax was examined by the tax authority and thus the authority have full knowledge about relevant information.

d). the sustaining point of any proposition is made on its technical merit.

Reference: https://en.wikipedia.org/wiki/Fin_48

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