RSM Resources

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies 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.

FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in financial statements tax positions taken or expected to be taken on a tax return. This includes decisions to classify a transaction or entity as tax exempt. 

FIN 48 requires an organization to record in financial statements the uncertainty that a tax position will be sustained if examined by the taxing authorities. If a tax position is more-likely-than-not (MLTN) — more than 50 percent — to be expected to be sustained by taxing authorities, or if taxing authorities were in possession of all relevant information to ascertain the position is MLTN, then that tax position isn’t considered uncertain and FIN 48 accounting and reporting provisions wouldn’t apply. Basically, the goal of FIN 48 is to identify uncertain tax positions taken by an entity and determine the impact of that uncertainty on the organization’s financial statements.

For tax exempt entities, two universal tax issues should be considered when performing audit procedures under FIN 48: Exemption/exempt status and unrelated business income tax. (Additional issues exist when NFPs control taxable subsidiaries.)

After specific tax positions have been identified, FIN 48 analysis begins with a two-step process:

• 1. Determine whether a tax position will be sustained or not based on an examination by taxing authorities of the tax position if the taxing authorities are in possession of all relevant facts pertaining to the tax position. The assumption under FIN 48 is that the tax position will be examined by taxing authorities.
• 2. Identify what tax benefit would be realized (or liability required to be paid) — if the MLTN threshold is met. This process is based on judgment — at various probabilities beginning with complete success (at 100 percent sustainability) — working down a matrix of possibilities that would then cumulatively result in an MLTN position.
  

The amount of benefit recognized in the statement of financial position and the amount taken, or expected to be taken, on the tax return may be different. These differences represent unrecognized tax benefits. The unrecognized tax benefits and the related interest and penalties will generally result in the recognition of a liability under FIN 48.  Alternatively, the amount of any net operating loss carry forward or amount of refundable tax may be reduced.

An NFP that has a liability for unrecognized tax benefits, and presents a classified statement of financial position, must classify this liability separately from other tax balances based on the expected timing of the cash flows. Deferred liability classification is either current or non-current and is based on a one-year or operating cycle criterion used for classifying other liabilities. The liability cannot be combined with deferred tax liabilities or assets.

In addition, the tax position recognized as a result of applying FIN 48 may also affect the tax basis or liabilities which would create temporary variations. A taxable and deductible temporary difference is the distinction between the book values in the statement of financial position and the tax basis of an item as determined by FIN 48 application. A liability recognized as a result of FIN 48 application cannot be classified as a deferred tax liability unless it arises from a taxable temporary difference.

If there are changes in net assets as a result of FIN 48 application, they will be accounted for as an adjustment to the opening balance of retained earnings. Additional disclosures about the impact of FIN 48 will also be required.

In February 2008, the FASB delayed the FIN 48 effective date for certain nonpublic enterprises to annual financial statements for fiscal years beginning after Dec. 15, 2007. NFPs that aren’t obligors on debt securities traded in a public markets will be required to adopt FIN 48 in the preparation of their 2008 annual financial statements. For NFPs that are obligors, the interpretation became effective for periods beginning after Dec. 15, 2006.

Proper evaluation of the implications of FIN 48 will likely take management a considerable amount of time, so organizations should start the evaluation process as soon as possible.