The Financial Accounting Standards Board (FASB) voted in November to delay the implementation of FIN 48 for nonpublic entities not already implementing FIN 48 until periods beginning after December 15, 2007. However, nonpublic entities already implementing FIN 48 and public entities must implement FIN 48 for periods beginning after December 15, 2006. The deferral was granted because of concern that many nonpublic entities and their CPA practitioners were not sufficiently aware of the impact of FIN 48.
FASB’s Statement of Financial Accounting Standards (SFAS) No. 109 (Accounting for Income Taxes) establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. SFAS No. 48 (Accounting for Uncertainty in Income Taxes), clarifies the application of SFAS No. 109 by establishing a threshold condition that a tax position must meet for any part of the benefit of that position to be recognized in financial statements. Under FIN 48, tax benefits (e.g., deductions, credits) from uncertain tax positions that reduce an enterprise’s current or future income tax liability are reported in its financial statements only to the extent each benefit is recognized and measured under the following two-step approach:
- The enterprise must evaluate each tax position to assess whether, based on the “technical merits” (i.e., based on the relevant tax law authorities), it is “more-likely-than-not” that the position would be sustained upon examination (including related appeals or litigation processes) by a tax authority that has full knowledge of all relevant information. “More likely- than-not” means a likelihood of more than 50 percent.
- If a tax position satisfies the more-likely-than not threshold, the enterprise then can proceed to measure the amount of tax benefit from the position that can be recognized in the financial statements. Under a cumulative probability approach, an enterprise records in its financial statements the largest amount of tax benefit that is greater than 50 percent likely of being realized after settlement with a tax authority that has full knowledge of all relevant information.
FIN 48 also provides guidance on measurement, derecognition, classification, and disclosure of tax positions. Although a recommendation had been made for an extension for pass-through entities because of the fact that pass-through entities have not been subject to FASB Statement No. 109 in the past, FASB did not approve such an extension. However, pass-through entities that are nonpublic entities qualify for the one year extension for nonpublic entities