By Wayne Kerr, CPA. Copyright 2009 Thomson Reuters/PPC All rights reserved.

Transcription

1 FIN 48: Private Company Adoption By Wayne Kerr, CPA Copyright 2009 Thomson Reuters/PPC All rights reserved.

2 About the Instructor Wayne Kerr, CPA, is a senior consultant for Thomson Reuters/AuditWatch. His duties include product development, program delivery, and technical research. Wayne specializes in audit methodology/process consulting; helping firms improve the quality and efficiency of their audits. Before joining AuditWatch, Wayne was an audit senior manager with Grant Thornton s Salt Lake City office working with clients in various industries. He also had quality assurance duties and training responsibilities for his business unit. Wayne is a member of the American Institute of Certified Public Accountants and holds BS and MA degrees from Brigham Young University. Wayne spends his non-working time volunteering in his community, and enjoying his four children and his wife, Susan. 2

3 Objectives By the end of this session you should be able to: List the effective dates of FIN 48 for your clients Describe the scope of FIN 48 Describe the key judgments that must be made to comply with FIN 48 List key considerations for auditors in auditing FIN 48 estimates 3

4 Tax Positions Decisions as to whether or not to file a tax return Decisions to exclude the reporting of taxable income Characterization of income or losses as capital or ordinary Allocations of income between tax jurisdictions Decisions to classify transactions, entities, or other tax positions o s as tax exempte 4

5 Current Practice: Cushion or Cookie Jar? When booking their income tax accruals, how, if at all, do your clients account for the contingency that the returns may be audited by the taxing authority resulting in disallowance of some or all of the positions taken on the returns? 5

6 Some Current Practices Using a valuation allowance to reduce deferred income tax assets for the estimated effects of the uncertainty. Reflecting a cushion by increasing the recorded liability for income taxes currently payable for the estimated effects of the resolution of the uncertainty. Establishing a predetermined confidence threshold for initially recognizing income tax benefits from positions taken and applying the FAS 5 probable criterion for recording contingent losses associated with those positions. 6

7 Example: Pre-FIN 48 Taxes Payable $90,000 Income Tax Expense $90,000 To record taxes payable and income tax expense for 12/31/2009 7

8 Example: FIN 48 Entry Income Tax Expense $5,000 LFUITB $5,000 To record the effect of uncertain tax positions at 12/31/2009 Balances on Financial Statements Taxes Payable $90,000 Income Tax Expense $95,000 LFUITB $5,000 8

9 Example: Penalties & Interest Entry Income Tax Expense $1,000 LFUITB $1,000 To record penalties and interest t related to uncertain tax positions Balances on Financial Statements Taxes Payable $90,000 Income Tax Expense $96,000 LFUITB $6,000 9

10 Example: Temporary Difference Entry Taxes Payable $90,000 Income Tax Expense $95,000 Deferred Tax Liability $5,000 To record deferred taxes at 12/31/2009 Balances on Financial Statements Taxes Payable $90,000 Income Tax Expense $95,000 Deferred Tax Liability $5,000 10

11 Example: FIN 48 Temporary Difference Entry Deferred Tax Liability $5,000 LFUITB $5,000 To record the effect of uncertain tax positions at 12/31/2009 Balances on Financial Statements Taxes Payable $90,000 Income Tax Expense $95,000 Deferred Tax Liability - LFUITB $5,000 11

12 Example: Initial Adoption Entry Income Tax Expense $5,000 LFUITB $5,000 To record uncertain income tax positions arising i during 2009 Retained Earnings $7,000 LFUITB $7,000 To record uncertain income tax positions arising prior to 2009 Balance in LFUITB at 12/31/09 = $12,000 12

13 Scope Income taxes subject to FAS 109 o o o o Federal State Local Foreign Nonprofits Flow-through entities including REITs Registered investment companies 13

14 Uncertain Tax Positions Initial recognition of the financial statement effects of a tax position should occur when it is more likely than not (MLTN), based on its technical merits, that the tax position will be upheld upon examination. 14

15 Uncertain Tax Positions (cont.) FIN 48 Guidelines for Evaluating Tax Positions: Presume taxing authority will examine position with full knowledge of relevant data. Derive technical merits of tax position from authoritative ti tax laws and their applicability to facts and circumstances of tax position. Take into account past practices and precedents of taxing authority. Evaluate each tax position independently. 15

16 FIN 48 in a Nutshell 16

17 The Assumption 17

18 Before FIN 48 As-Filed Tax Basis GAAP Basis Deferred Income Taxes (FAS 109) 18

19 After FIN 48 As-Filed Tax Basis Tax Basis Adjusted for FIN 48 GAAP Basis Unrecognized Deferred Tax Benefits Income Liability Taxes (Cushion) (FAS 109) 19

20 Notable and Quotable. FASB s Justification for FIN 48 Some Board members believe that basing accounting for tax positions on examination risk is analogous to reporting accounts payable based on the amount that...would be paid if the creditor filed suit to collect the liability. FIN 48- B19 20

21 ASU Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities Released Comments Due Expected Final 5/18/2009 6/17/2009 Done! Proposed Effective Date For those that have already adopted FIN 48 Periods ending after 9/15/2009 Upon Initial Adoption of FIN 48 for all other entities 21

22 Nonpublic Company Limited Disclosure Relief Proposal would no longer require Reconciliation of liability for unrecognized T.P. Unrecognized T.P. affecting effective tax rate 22

23 Pass-through Entities and Tax-exempt tnfps Overriding Principles 1. All entities are subject to FIN 48/ASC even if the only income tax position in question is the entity s status. 2. Even if it is MLTN that the entity s status as a pass-through entity or tax-exempt NFP would be sustained on examination, the entity may have other tax positions to consider that t are within the scope of FIN 48/ASC Existence of a tax position is considered separately from consideration of uncertainty t in that position. 23

24 Example Tax Positions 1. Challenges to taxpayer status 2. S corporation built-in gains tax 3. Subject to entity-level state or local taxes a. State that disregards S status b. State that imposes entity-level tax c. Nexus: Failure to file returns/pay taxes 4. Exempt organization UBIT 24

25 Effective Date for FIN 48 Type of Reporting Entity 1. Public entity or a nonpublic entity that is consolidated by a public entity that applies U.S. GAAP Effective Date Fiscal years beginning after December 15, Nonpublic entity that (1) is not Fiscal years beginning after December consolidated by public enterprise that 15, 2006 applies U.S. GAAP, and (2) adopted FIN 48 in a full set of annual financial statements issued prior to 2/1/08 3. Same as 2, except the entity adopted FIN 48 in a full set of annual financial statements issued between 2/1/08 d 12/29/08 FSP FIN 48-2 deferred the effective date for 1 year to fiscal years after 12/15/07 with early adoption permitted t th b i i f th fi l 2/1/08 and 12/29/08 at the beginning of the fiscal year 4. Same as 2, except the entity did not adopt FIN 48 in a full set of annual financial statements issued prior to 12/30/08 Management may elect deferral to fiscal years beginning after 12/15/08 25

26 Disclosures A Roadmap for the IRS? 26

27 Disclosures The accounting gpolicy regarding gclassification of interest and penalties. 27

28 Disclosures A tabular reconciliation of the changes in unrecognized income tax benefits that includes at a minimum: The balance at the beginning of the period. For income tax positions taken during prior periods: i) Gross increases ii) Gross decreases For income tax positions taken during the current period: i) Gross increases ii) Gross decreases Decreases resulting from settlements with taxing authorities. Decreases resulting from the lapse of the applicable statute of limitations. The balance at the end of the period. 28

29 Disclosures The total amount of unrecognized income tax benefits that, if recognized, would affect the effective tax rate. This excludes amounts that result in shifts between current and deferred income taxes. The total amounts of interest and penalties recognized in the income statement. The total amounts of interest and penalties recognized in the balance sheet. 29

30 Disclosures At the date of the latest balance sheet presented: Disclosures regarding certain significant estimates [as required by SOP 94-6 (ASC 275) and FAS 5 (ASC 450)] with respect to income tax positions for which it is reasonably possible that t there will be a significant ifi increase or decrease in the estimate of unrecognized income tax benefits in the next 12 months including, at a minimum: i) The nature of the uncertainty ii) The nature of the event that could occur in the next 12 months that would cause the change iii) An estimate of the range of the change that is reasonably possible or, if such an estimate cannot be made, a statement to that effect 30

31 Disclosures A description of tax years that remain subject to examination by major tax jurisdiction. In the fiscal year of adoption, the cumulative effect of the change on retained earnings in the balance sheet as of the date of adoption. 31

32 Interim vs. Year-End Interim Annual Recognition Measurement Disclosure 32

33 Reporting Reminder Need to Add Emphasis Paragraph Regarding Consistency As described in Note XX to the financial statements, on January 1, 2009 the Company changed its method of accounting for unrecognized tax benefits to adopt Financial Accounting Standards Board Interpretation Number

34 Documentation Required Audit program Documentation checklist Compliance checklist Summary memo on each tax position 34

35 Audit Evidence 35

36 Communicating with clients 36

37 Ethics and Independence 37

38 Q&A We will be happy to take questions at this time. 38

39 Webinar Administration Please remember to fax your completed evaluation to: PPC Administration (817)

40 Solutions from Thomson Reuters The Webinar Learning Network Upcoming Webinars 12/15 FASB Codification (Bundled with Checkpoint FASB FRM) 12/17 IFRS for Private Entities 12/ Year-End Accounting Update with Checkpoint Accounting & Auditing Training (4 Hr) Register Now Visit us at To register and see more information on our Webinar series Solutions from Thomson Reuters 40

41 PPC In-House Training We Come to You! Accounting for Income Taxes Including FIN 48 PPC's Approach to Evaluating and Testing Internal Controls Including Communicating Deficiencies Under SAS Nos. 114 and 115 Booking Now! Visit us online: 41