FIN 48 Expands Reporting Requirements


Initially released in June 2006, Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, significantly revised the requirements for measuring and disclosing uncertain tax positions. FIN 48 requires both public and private companies to examine their uncertain tax positions and disclose any related potential tax liabilities on their financial statements. This article lists required disclosures and explains that failure to comply could result in charges of fraud by those who rely on the financial statements to their detriment — including regulators and shareholders.

Initially released in June 2006, Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, significantly revised the requirements for measuring and disclosing uncertain tax positions. FIN 48 requires both public and private companies to examine their uncertain tax positions and disclose any related potential tax liabilities on their financial statements.

Failure to comply could result in charges of fraud by those who rely on the financial statements to their detriment — including regulators and shareholders. So corporate attorneys must understand FIN 48’s ins and outs.

Recognition and measurement
FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a company’s tax return. A tax position can include a decision not to file a tax return; an allocation or shift of income between jurisdictions; the characterization of income or a decision to exclude reporting taxable income in a tax return; or a decision to classify an entity, transaction or other position in a tax return as tax-exempt.

Companies should recognize the financial statement effects when it’s “more likely than not” that a tax position will be sustained upon examination of its technical merits. So, if a company’s tax position has a better than 50% chance of being upheld, it must recognize the largest possible dollar amount of resulting tax benefit.

Required disclosures
FIN 48 also mandates the disclosure of certain information at the end of each annual reporting period presented, including:

  • A table reconciling the beginning and ending period balances of the total amounts of unrecognized tax benefits,
  • The total amount of unrecognized benefits that would affect the effective tax rate if recognized,
  • The total amounts of interest and penalties recognized in the statements of operations and financial position,
  • For positions for which it’s reasonably possible the amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months, the nature of the uncertainty and event that would trigger the change, and an estimate of the range of the possible changes, and
  • A description of tax years that remain subject to examination by major tax jurisdictions.

FIN 48 further requires companies to evaluate new information throughout the year and recognize, derecognize or re-measure tax positions during the interim period in which the information becomes known. Significant events may include taking of a new tax position, settlement of a tax matter through litigation or negotiation, expiration of a statute of limitations, or a development relative to tax law that affects a tax position taken. A tax position need not be legally extinguished to subsequently recognize or measure it.

Clarifying “settlement”
After it released FIN 48, FASB received inquiries about the meaning of the term “settlement” in relation to subsequent recognition. Specifically, FASB was asked whether a taxpayer could recognize a previously unrecognized tax benefit when the completion of an examination or audit by a taxing authority was the only factor that had changed since determining the tax benefit shouldn’t be recognized.

In May 2007, FASB issued FIN 48-1. It recognizes that, because examinations occur in a variety of ways, assessing whether a tax position is effectively settled is a matter of judgment. FIN 48-1 explains that the assessment of settlement should be made on a position-by-position basis. According to this issuance, though, a taxpayer could conclude that all positions in a particular tax year are effectively settled.

Under FIN 48-1, settlement has effectively occurred if:


  1. The taxing authority has completed its examination procedures, including all appeals and administrative reviews required and expected for the tax position,
  2. The taxpayer doesn’t intend to appeal or litigate, and
  3. It’s remote that the taxing authority would examine or re-examine any aspect of the tax position.

In accessing “remoteness,” a company should consider the tax authority’s policy on reopening closed examinations and the specific facts and circumstances of the tax position.