Companies will greet the new fiscal year with increased scrutiny on income tax reporting, thanks to the Federal Accounting Standards Board’s adoption of Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Intended to clarify the accounting for income taxes, FIN 48 creates a single model to address uncertainty in income tax positions.

FIN 48 provides two steps for companies to determine whether a tax position may be included in financial statements. In step one (recognition), a company must use a position’s technical merits only to judge whether it is "more likely than not" to be sustained upon examination. Step two (measurement) further evaluates the position to determine the largest cumulative amount of benefit with more than a 50 percent chance of being realized.

For example, if a tax position is 10 percent likely to produce a $100 benefit, 20 percent likely to produce an $80 benefit, 25 percent likely to produce a $60 benefit and 30 percent likely to produce a $40 benefit, the company would report a benefit of $60, as this is the largest cumulative amount of benefit that is more than 50 percent likely to be realized.

Positions that do not qualify under initial recognition must be re-evaluated and would be required for inclusion:

• In the first interim period that they do meet the "more likely than not" standard;

• When resolved through negotiation or litigation with the taxing authority; or

• Upon expiration of the statute of limitations.

FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transitioning. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the "more likely than not" threshold. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions.

One of the more controversial aspects of FIN 48 is its expanded disclosure requirements, which include a tabular rollforward of the beginning and ending aggregate unrecognized tax benefits, as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months.

FIN 48 is effective for fiscal years beginning after December 15, 2006 and applies to all tax positions related to income taxes subject to FASB Statement No. 109. This includes tax positions considered to be routine as well as those with a high degree of uncertainty. This guidance is also applicable to pass-through entities, non-taxable entities and entities whose tax liability is subject to a 100 percent credit for dividends paid.

The professionals at Calvetti, Ferguson & Wagner are uniquely prepared to guide your company through the complexities of FIN 48. We understand the pressure facing public companies to implement these strict new rules. Our Tax practice is led by an expert in FAS 109, FIN 48 and international taxation. With 25 years of experience providing clients with comprehensive tax planning and compliance services, you can rest assured that your tax concerns will be handled with authority and proficiency.