Four Steps to FIN 48 Compliance for Privately Held Companies and Nonprofits
Financial Accounting Standards Board (FASB) Interpretation Number 48, or FIN 48, “Accounting for Uncertainty in Income Taxes”, is intended to reduce uncertainty in accounting for income taxes and to increase transparency in the financial statements of companies and nonprofit organizations.
Established in late 2006, FIN 48 regulations originally applied only to public organizations. Starting January 1, 2009, FIN 48 began applying to privately held companies too, meaning that the first reporting periods under this regulation for companies reporting mid-year are approaching.
FIN 48 is also applicable to tax-exempt, non-profit organizations. Since these organizations benefit financially from their tax-exempt status, it is essential that their recognition of tax positions is in order. Incorrect reporting in this regard may lead to tax liability.
External auditors now need evidence that these companies and organizations:
Considered all material tax positions
- Determined which positions meet a “more-likely-than-not” standard of probability
- Measured how much of each tax position will be realized
- Ensured that the total amount of liability has been properly tracked and recorded in the financial statements
FIN 48 attempts to reduce the margin of error between the estimation and reality of U.S. tax liability by requiring that organizations determine whether or not a tax position will be sustained by tax officials. FIN 48 compliance is reached through a series of four steps:
- Recognition
- Measurement
- Disclosure
- Presentation
Tax positions an organization holds, and whether or not those positions meet the “more-likely-than-not” standard, are determined during “recognition.” This means that there is a greater than 50-percent chance that the tax positions held by the organization will be upheld by the official taxation process.
FIN 48 requires that the amount of tax benefit from the positions held be accurately reported in the organization’s financial statements. Discrepancy between tax positions taken in an actual tax return and benefits reported on the balance sheet increases liability for income taxes payable and can reduce the company’s deferred tax assets or increase their deferred tax liabilities.
Using the most up-to-date and accurate information available at the time, the measurement stage takes into account the different possible outcomes and their probabilities to more accurately measure tax liability.
The disclosure step requires a series of items to be reported, including:
- Gross amounts of changes in unrecognized tax benefits as a result of tax positions taken in prior periods
- Gross amounts of changes in unrecognized tax benefits as a result of tax positions taken in the current period
- Amounts arising from decreases in unrecognized tax benefits due to settlements with tax authorities
- Reductions in the amount of unrecognized tax benefits as a result of the lapse in applicable statutes of limitations
Disclosure of the organization’s policy on classification of interest and penalties accrued within the income statement is also required.
Finally, FIN 48 takes companies and organizations through the presentation stage, with clear guidelines on how to classify both recognized and unrecognized tax benefits, interests and penalties.
Now that FIN 48 standards are applicable across both privately held, publicly traded and tax-exempt organizations, understanding of and compliance with these guidelines is essential. The sooner a company conducts their FIN 48 analysis the better, and with an experienced AMS financial professional in your corner, FIN 48 analysis can be conducted well in advance of your deadline.
Reprinted from the January, 2010, issue of The AMS Report, with permission from Accounting Management Solutions, Inc., Waltham, Mass., www.amsolutions.net