Accounting for uncertain tax positions

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March 06, 2006

In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of proposed Interpretation, Accounting for Uncertain Tax Positions – an Interpretation of FASB Statement No. 109. The proposed Interpretation would clarify Statement 109, Accounting for Income Taxes, to indicate the criteria that would have to be met for a tax benefit to be recognized in an enterprise’s financial statements. The proposed Interpretation raised concerns among financial statement preparers because the probable threshold that would be required before a tax position could be recognized would negatively impact the financial statements of many companies.

FASB redeliberation

The FASB began redeliberating the proposed Interpretation at its November 22, 2005 meeting. The most significant decision reached at that meeting was to change the initial recognition criterion for uncertain tax positions from probable to more likely than not. The FASB continued redeliberations at its January 11, 2006 meeting. Following is a summary of the decisions made at that meeting.

Decisions at the January 11 meeting

Delay of the effective date

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The FASB decided that the final Interpretation would be effective as of the beginning of the first annual period beginning after December 15, 2006 (January 1, 2007, for a company with a calendar year-end.) This is a change from the Exposure Draft, which would have required adoption as of the end of the first fiscal year ending after December 15, 2005 (December 31, 2005 for a company with a calendar year-end). Many companies had indicated to the FASB that a delay in the proposed effective date was necessary because they believed it would take nine to twelve months to perform the necessary analysis to implement the proposed Interpretation.

Early adoption would be encouraged (provided the reporting enterprise had not yet publicly released financial statements for the period of initial adoption).

Other decisions

Other decisions made by the FASB include:

Transition. The FASB reaffirmed its decision that retroactive restatement would be prohibited and that the cumulative effect of applying the Interpretation would be recognized in the period of adoption. However, the FASB decided that the cumulative-effect adjustment would be to the beginning balance of retained earnings rather than to income of the period, as proposed in the Exposure Draft.

Subsequent recognition and measurement. The FASB decided that a new assessment of the same information previously considered could not be used to support subsequent recognition, derecognition, and measurement. If an enterprise did not initially evaluate a tax position as meeting the more-likely-than not threshold, its subsequent recognition of the benefit could only occur as a result of changes in facts and circumstances, such as an identifiable event or new information. Similarly, changing the measurement or recognition of a previously recognized benefit would require a change in judgment based on new information or events.

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