PORTFOLIO

Accounting for Income Taxes: Uncertain Tax Positions (FIN 48) (Portfolio 5002)

BNA Tax and Accounting Portfolio 5002-2nd, Accounting for Income Taxes: Uncertain Tax Positions, provides a comprehensive analysis of the treatment of uncertain tax positions under the FASB Accounting Standards Codification.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5002-2nd, Accounting for Income Taxes: Uncertain Tax Positions, provides a comprehensive analysis of the treatment of uncertain tax positions under the FASB Accounting Standards Codification.
This Portfolio describes FASB's two-step process for determining tax benefits that can be reported on the financial statements: (1) recognition—determine if the tax position meets the threshold test of “more likely than not” (MLTN) that the company will be able to sustain the tax return position, based solely on the position's technical merits; (2) measurement—if the tax position meets the MLTN threshold test, measure the tax benefit as the largest amount of benefit that is cumulatively greater than 50% likely to be realized.
This Portfolio also discusses FASB's guidance on classification of tax assets and liabilities and the determination and reporting of interest and penalties. It further examines the required qualitative and quantitative disclosures of (1) roll-forwards of all unrecognized tax benefits set out in the form of a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis; (2) reasonably possible changes in the recognized tax benefits in the next 12 months; and (3) open tax years by major jurisdictions.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5002-2nd, Dunbar & McEligot, Accounting for Income Taxes: Uncertain Tax Positions (Accounting Policy & Practice Series).


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AUTHORS

AMY DUNBAR, PH.D.
Amy Dunbar, Ph.D. (Accounting), University of Texas at Austin; B.A. (Economics), Macalester College. Dr. Dunbar is an accounting professor at the University of Connecticut. She has written articles for publications including The Encyclopedia of Taxation and Tax Policy; Financial Reporting Watch; Journal of Public Economics; National Tax Journal; Public Finance Review; Tax Adviser; Tax Notes; Journal of the American Taxation Association; and Taxation for Accountants. She is on the editorial board of Accounting Horizons and the Journal of the American Taxation Association. Dr. Dunbar has received a number of teaching awards, and is a past vice-president of the American Taxation Association.

KATHLEEN MCELIGOT, CPA
Kathleen McEligot, CPA; B.S., University of California, Berkeley. Ms. McEligot is a tax partner at Deloitte Tax LLP, with over 32 years of professional experience. She specializes in corporate taxation, with extensive experience in the financial services, distribution and retail industries. As a firm designated specialist in Accounting for Income Taxes (ASC 740), she consults on income tax accounting issues for all types of companies. Ms. McEligot is a frequent lecturer, speaking before groups such as the Tax Executives Institute (TEI). She is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction, Background, and Scope of Portfolio

Introductory Material

A. FAS 5 vs. FIN 48 (FIN 48, ¶ ¶ 1-2)

B. The FIN 48 Process

1. Identifying Tax Positions

2. Recognition Threshold: Evaluating Tax Positions

3. Measuring Uncertain Tax Benefits

4. Accruing Interest and Penalties

5. Classifying Uncertain Tax Benefits in Financial Statements

6. Preparing Financial Statement Disclosures

C. Entities Subject to FIN 48

D. Companion Portfolio

II. Identification of Tax Positions

Introductory Material

A. Scope (FIN 48, ¶ 3)

1. Taxes Based on Income

2. "Material" Tax Position

3. Indemnifications

B. Definition of Tax Position (FIN 48, ¶ 4)

1. Unit of Account Determination (FIN 48, ¶ 5)

a. Level-Aggregating vs. Disaggregating

b. Unit of Account Example (FIN 48, ¶ ¶ A5-A6)

(1) Possible Units of Account

(2) Tax Return Level and Taxing Authority Level Considerations

2. Unit of Account Consistency

a. Consistency

b. Change in Unit of Account Example (FIN 48, ¶ ¶ A8-A9)

C. Identifying All Tax Positions in Open Years

1. Jurisdiction Considerations

2. Identifying All Tax Positions

III. Recognition Threshold: Evaluating Tax Positions

Introductory Material

A. Standards Defined

1. Standards for Financial Reporting

a. Beyond a Reasonable Doubt

b. Probable

c. More Likely Than Not

d. Reasonably Likely

e. Reasonably Possible

f. Remote

2. Standards for Tax Return Reporting

a. MLTN

b. Substantial Authority

c. Realistic Possibility

d. Reasonable Basis

e. Not Frivolous

f. Summary of Tax Return Standards

B. Determining MLTN for FIN 48 (FIN 48, ¶ 7)

1. Presume the Position Will Be Examined

2. Presume the Examiner Has Full Knowledge

3. Evaluate Positions Based on Technical Merits

4. Evaluate Without Consideration of Offset or Aggregation of Positions

5. Administrative Practices and Procedures Exception (FIN 48, ¶ ¶ A12-A13)

C. Temporary Differences

D. Valuation Issues

E. State Nexus Issues (FIN 48, ¶ ¶ A14-A15)

1. Nexus Unit of Account

2. Years Before Filing

3. Never Filed

4. Effect of Amnesty Offers

5. Voluntary Disclosure Agreements

F. Cross-Border Intercompany Transactions

IV. Measuring Uncertain Tax Benefits

Introductory Material

A. Measuring Amount for Initial Recognition (FIN 48, ¶ 8)

1. Highly Certain Positions (FIN 48, ¶ ¶ A19-A20)

2. Uncertain Positions Measured With Cumulative Probability Tables

a. Seven Outcome Probability Table (FIN 48,¶ ¶ A21)

b. Three-Outcome Probability Table (FIN 48, ¶ ¶ A23-A24)

3. Potential Outcomes: IRS Issue Identification

a. Industry Issue Focus: Tier I, II, and III Issues

b. Coordinated Issue Papers

(1) Coordinated Issue Papers Issued by the LMSB Commissioner

(2) Appeals Coordinated Issues

4. Measurement of a Tax Position After Settlement of a Similar Position

5. "All or Nothing" Positions

B. Recording Uncertain Tax Benefits

1. Permanent Difference

2. Temporary Difference

a. Different Book and Tax Return Treatment (FIN 48, ¶ ¶ A26-A27)

b. Same Book and Tax Return Treatment

V. Changes in Recognition or Measurement

Introductory Material

A. Subsequent Recognition (FIN 48, ¶ 10)

1. Change in Judgment: Position Meets MLTN

2. Resolution of Uncertainty Through an "Effective Settlement" (FIN 48, ¶ ¶ 10A-10C)

a. Examination Level

b. Appeals Level

c. Closing Agreements

3. Resolution of Uncertainty Through a Statute of Limitations Expiration

B. Subsequent Derecognition (FIN 48, ¶ ¶ 11-12, A31-A32)

C. Subsequent Measurement Change

D. Purchase Accounting Issues

1. Acquisition Date Tax Assets and Liabilities (FIN 48, ¶ 12A)

2. Post-Acquisition Date Changes to Tax Assets and Liabilities (FIN 48, ¶ 12B)

E. Reporting Changes in Recognition or Measurement

1. Prior Year Position (FIN 48, ¶ 13)

2. Prior Interim Period (Same Year) Position (FIN 48, ¶ 14)

VI. Accrual of Interest and Penalties

Introductory Material

A. FIN 48 Interest Provisions (FIN 48, ¶ 15)

B. Interest Accrual on Temporary Differences

C. FIN 48 Penalty Provisions (FIN 48, ¶ 16)

VII. Financial Statement Classification of Unrecognized Tax Benefits

A. Balance Sheet Classification (FIN 48, ¶ ¶ 17-18)

1. Current vs. Noncurrent

2. Gross vs. Net

a. UTB and NOL Reduction

b. UTBs and Related Tax Impacts

c. Positions in Valuation Allowance Tax Strategies (FIN 48, ¶ ¶ 9, A16-A18)

3. Intraperiod Allocation

4. Subsidiary Financial Statements

B. Classification and Disclosure of Income Tax-Related Interest and Penalties (FIN 48, ¶ ¶ 19-20)

VIII. Financial Statement Disclosures

A. Tax Disclosure in General

1. Annual Reports

2. Interim Reports

B. FIN 48 Mandated Disclosures

1. Annual Report Disclosures (FIN 48, ¶ 21)

a. Tabular Reconciliation (FIN 48, ¶ 21(a))

(1) Gross Increases and Decreases in Prior Period UTBs (FIN 48, ¶ 21(a)(1))

(2) Gross Increases and Decreases in Current Period UTBs (FIN 48, ¶ 21(a)(2))

(3) Settlements of UTBs (FIN 48, ¶ 21(a)(3))

(4) Recognition of UTBs Due to Statute Lapses (FIN 48, ¶ 21(a)(4))

b. Amount of UTBs That Will Impact the ETR (FIN 48, ¶ 21(b))

c. Amount of Interest and Penalties Recognized in the Statements of Operations and Financial Position (FIN 48, ¶ 21(c))

d. Total Amount of UTBs That Have a Reasonable Possibility of Significantly Changing Within 12 Months of Reporting Date (FIN 48, ¶ 21(d))

e. Description of Open Tax Years by Jurisdiction (FIN 48, ¶ 21(e))

2. Interim Disclosures

C. MD& A Considerations

D. Road Map Concerns

IX. FIN 48 Adoption Adjustments and Disclosures

Introductory Material

A. Interim Report for Quarter of Adoption (FIN 48, ¶ ¶ 22-24)

1. The Effect of UTB Changes on Retained Earnings

2. The Effect of UTB Changes on Deferred Tax Assets and Liabilities

3. The Effect of UTB Changes on Goodwill

4. Interest and Penalties

B. Examples of First Quarter 10-Q Disclosures and Year End 10-K

C. What Happened When FIN 48 Was Adopted

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary

Worksheet 2 FIN 48 Sections Revised By FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (May 2, 2007)

Worksheet 3 IRS Tier I and II Compliance Issues

Worksheet 4 IRS Coordinated Issue Papers

Worksheet 5 IRS Form 866

Worksheet 6 IRS Form 906

Worksheet 7 FIN 48 Disclosure Provisions

Worksheet 8 FIN 48 Disclosure Example

Worksheet 9 FIN 48 First Quarter Disclosures-Baker Hughes Incorporated

Worksheet 10 FIN 48 Form 10-K Disclosures-Baker Hughes Incorporated

Worksheet 11 FIN 48 First Quarter Disclosures-Selected Firms

Worksheet 12 Description of Oregon VDA Program

Worksheet 13 Description of National Nexus Program

Bibliography

OFFICIAL

Statutes

Federal

States

Public Laws

Regulations

Cases

Committee Reports

American Bar Association

American Institute of Public Accountants:

AICPA Statements on Auditing Standards (SAS)

AICPA Statements of Position (SOP)

AICPA Interpretations

Accounting Principles Board Opinions

AICPA Publications

Financial Accounting Standards Board:

FASB Statements of Financial Accounting Standards

FASB Concepts Statements

FASB Exposure Drafts

FASB Interpretations

FASB Staff Implementation Guides

FASB Staff Positions

FASB Emerging Issues Task Force (EITF) Abstracts and Topics Interpretations

Public Company Accounting Oversight Board:

PCAOB Auditing Standards

PCAOB Releases

PCAOB Rules

PCAOB Staff Questions and Answers

Securities and Exchange Commission:

SEC Staff Accounting Bulletins

SEC Releases

SEC Staff Statements

SEC 10-Qs

Internal Revenue Service:

IRS Chief Counsel Memos

IRS Policy Statements

IRS Notices

IRS Information Release

IRS Internal Revenue Manual

Revenue Rulings

Revenue Procedures

IRS Publications

UNOFFICIAL

Publications

CPA and Law Firm Publications

Speeches