Tax News

CCH (cch.taxgroup.com) reports:

The effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), should be delayed for private companies, Judith H. O'Dell, chair of the Private Company Financial Reporting Committee (PCFRC), told CCH on October 12. The PCFRC recently wrote to the FASB urging a delay, cautioning that many private businesses and financial statement preparers are unsure about FIN 48's implications for pass-through entities. FASB members will likely address the PCFRC's concerns at a board meeting sometime in 2007.
CCH Comment. The FASB has previously declined to delay the effective date of FIN 48. In January, FASB members voted unanimously to leave unchanged the original effective date for fiscal years beginning after December 15, 2006 (TAXDAY, 2007/01/18, M.1).
Recognition and Measurement
FIN 48 is designed to clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Evaluating a tax position under FIN 48 is a two-step process. First, the enterprise determines if it is more likely than not that a tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is then measured to determine the amount of benefit to recognize in the financial statements.
Immediate Action Needed
O'Dell noted that most private companies are confronted with FIN 48 for the first time in preparing year-end financial statements. Therefore, the FASB should act quickly to delay the effective date of FIN 48 for private companies so they can get up to speed with the requirements and implications of FIN 48.
Pass-Through Entities
O'Dell explained that the implications of FIN 48 are especially important for private businesses because many operate as pass-through entities, such as S corporations or limited liability companies. FASB Statement 109 does not directly address pass-through entities. Many private company financial statement preparers are unaccustomed to accounting for income taxes if the private company operates as a pass-through entity.
The PCFRC has identified several issues arising from FIN 48's implications to pass-through entities. These include the level at which taxes are assessed (owner or entity) and the ramifications of FIN 48's requirements on acquisitions and tax indemnification. O'Dell used the example of a pass-through entity with a research credit on its return. "Under FIN 48, the entity has to assume that the IRS will look at it."
Education
"Some private companies are just learning about the implications of FIN 48," O'Dell noted. Unlike many large public companies, small private companies frequently do not have the resources to follow FASB proceedings. They often learn about new requirements like FIN 48 at continuing education sessions after the effective date. The PCFRC is engaged in educational outreach and is contacting constituent groups to determine what other issues they are confronting in implementing FIN 48.
FASB Meeting
O'Dell told CCH that the PCFRC's concerns will be placed on the FASB's agenda. However, she had not yet heard when FASB members will discuss the issue.
By George L. Yaksick, Jr., CCH News Staff
PCFRC Letter Re: FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes