FIN 48 Analysis

Accounting Standards Codification 740-10, (previously known as FIN 48) became effective in 2007 for publicly traded entities, and is now effective for all entities adhering to US Generally Accepted Accounting Principles (GAAP). FIN 48 requires companies to determine and note whether or not they have uncertain tax positions (UTPs).  If an organization has adopted a tax position that would not hold up under examination, then the organization may have a substantial tax liability. The areas that are often affected by FIN 48 provisions are State Taxes (nexus issues), Foreign Taxes, Net Operating Losses, and Exemptions. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption, with the cumulative effect adjustment reported as an adjustment to the opening balance of retained earnings.

Documentation of UTPs is a two-step process:

1. Step one is Recognition. An organization must identify an uncertain tax position and determine, based solely on the technical merits of the position, whether it is more-likely-than-not (i.e. a likelihood of occurrence greater than 50%) that this position would be sustained upon examination by a taxing authority. For purposes of ASC 740-10, an organization must assume that it will be audited and tax authorities will have full knowledge of all relevant information.

2. Step two is Measurement of UTPs. If, based on the technical merits, it appears more-likely-than-not that the position will be sustained upon examination, the organization must determine the outcome that is most favorable with a cumulative likelihood of more than 50%.  All UTPs must be ascertained for the open tax years and aggregated. If in the aggregate the UTPs are material, it must be disclosed in a footnote within financial statements. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for de-recognition of tax positions.

An organization must provide detailed documentation of its tax positions. The more certain a position is, the less documentation is needed. Correspondingly, a less certain position should have more documentation to show that it is more likely than not to be sustained upon audit.

One of the important aspects of FIN 48 is its expanded disclosure requirements, which include a rollforward of the beginning and ending aggregate unrecognized tax benefits, calculation of total interest and penalties recognized in the analysis, 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 12 months. These disclosures are required at each annual reporting.

Alliance can help your organization meet its FIN 48 requirements. We will assist you with respect to all aspects of your compliance with FIN 48 provisions. Our team can work with you to identify an uncertain tax position and develop an effective action plan.
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