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Overview of FIN 48

March 10, 2023

On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 ("FIN 48") on Accounting for Uncertainty in Income Taxes. Currently, due to the work of the FASB Accounting Standards Codification (ASC), the code number has been changed and is included in FASB Interpretation No. 740 (ASC 740), "Income Taxes”.

Although many companies may already be familiar with this, we summarize it here because it is a point often asked by companies that just started operations in the U.S. as a primary difference between Japanese and U.S. accounting and taxation.

A focal "uncertain tax position" is an item for which the tax treatment is uncertain or for which there is an unresolved dispute between the reporting entity and the relevant tax authority, usually arising when there is uncertainty regarding the interpretation of tax law or the application of tax law to a particular transaction, or both. The accounting for uncertainty in income taxes is based on the evaluation of the tax position that is the subject of the two step approach;

(1) Recognition, and

(2) Measurement

For recognition of (1), the term refers to the initial recognition by an entity of the impact of a tax position on its financial statements when it is more likely than not that a tax position will be sustained upon tax examination based on the technical aspects of the determination criteria. as a FIN 48 measure. At a minimum, management should establish and document control processes and controls and, at management's discretion, identify the following control objectives focused on uncertain tax positions:

  • Are all material tax positions that have been or will be reported on all tax returns recognized.

  • Whether the appropriate unit of accounting has been determined for each significant tax position.

  • Whether only tax positions with a realization probability greater than 50% are recognize.

  • Whether all tax positions with a realization potential only greater than 50% are recognized.

  • Whether all previously unrecognized tax positions are subsequently recognized in the first reporting period in which the 50% realization threshold is met.

  • Whether all previously recognized tax positions have been derecognized in the first reporting period in which the 50% feasibility threshold cannot be sustained.

  • Whether the amount of benefit recognized for each tax position is the maximum amount that is more likely than not to exceed 50%.

  • Whether information such as newly enacted tax laws, regulations, and court records that affect how the benefits of a tax position are recognized and measured have been timely and properly evaluated and recognized.

  • Whether the method of recognition and measurement of the benefits of the tax position reflects all information available to management at the reporting period and does not take into account facts, circumstances, or changes that occurred after the reporting period but before the date the financial statements were issued

  • Whether late interest and penalties are properly measured and recorded for all uncertain tax positions

  • Whether unrecognized and recorded tax benefits, including late interest and penalties, are properly presented, segregated, and disclosed in the financial statements

Although FIN 48 allows for a different level of probability to be assessed than management's assertion in financial filings, and the so-called tax cushion is recorded separately on the balance sheet, listing all significant tax positions and measuring the 50% probability individually can be a significant burden on personnel in the course of closing tasks. It can be burdensome. In particular, transfer pricing issues require difficult decisions in recognition and measurement in the absence of a clear policy, so it is necessary to work with outside experts on the recognition and measurement process to document the paths taken to reach these decisions.

With respect to the measurement of (2), the following is an example of a cumulative probability model for the 50% more likely than not criterion.

Company A may recognize the $200,000 as a tax benefit on its income statement because the $200,000 estimate at the 60% cumulative position is the maximum tax-benefit mount in excess of 50%. However, if Company A had recognized a tax benefit of $300,000 for this project, it would be required to record a FIN 48 tax liability for the remaining $100,000.

In practice, such an estimate would only be necessary in areas where disputes are likely to arise, such as transfer pricing, state taxes including nexus, and other complex tax credits. In such cases, it will be necessary to discuss the situation with tax professionals and auditors.


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