FAS 109 Presents: FIN 48 and FAS 109: Bringing Disclosure and Transparency Into Focus Rita Benassi Kathy McEligot Randall Sogoloff December 10, 2007
Keep in Mind The views expressed do not necessarily represent Deloitte & Touche LLP or Deloitte Tax LLP policy. The outcome of any specific matter depends upon the specific facts and circumstances in which the matter arises. The views expressed cannot be relied upon as accounting or tax advice. Check with a qualified advisor before taking any action.
Learning objective To enhance participants understanding of important issues and developments pertaining to: Understanding today s environment regarding financial reporting Understanding transparency expectations Understanding FASB and SEC rules of disclosure Looking forward 1
Agenda Environment Transparency Disclosures Looking forward
Environment
Environment Regulatory SEC is commenting on the adequacy of income tax disclosures PCAOB inspections have focused on income taxes as a higherrisk area and have noted deficiencies regarding the auditing of income taxes and documentation IRS s policy of restraint regarding access to workpapers is under pressure Senate Permanent Subcommittee on Investigations is asking about FIN 48 items related to foreign planning Tax continues to be a cause for material weaknesses and restatements FASB revamped the accounting for uncertainty (FIN 48) FASB and IASB continue their efforts towards convergence Companies are evaluating IFRS versus US GAAP 2
Material Weaknesses For the quarter ended March 31, 2007, our management concluded that we did not maintain effective controls over the preparation and review of the quarterly and annual tax provision and the related financial statement presentation and disclosure of income tax matters. Specifically, our historical documentation of related tax positions was not adequate to ensure the completeness and accuracy of FIN 48 Accounting for Uncertainty in Income Taxes, requirements for the quarter ended March 31, 2007, and could have resulted in a misstatement in the aforementioned tax accounts that could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. 3
Poll question #1 How much time has your organization spent on its income tax accounting and reporting this year as compared to prior year? Significantly more time Somewhat more time About the same time Less time Don t know / not applicable
Transparency
Transparency Expectations Increased transparency being demanded by Congress, SEC, IRS, auditors and users in all areas Income taxes are an area of focus Even when accounting follows GAAP, disclosures may be necessary to give investors sufficient information 4
SEC Comment Letters In the past, the focus of SEC comment letters regarding income taxes has been on valuation allowances More recently, there have been comments focused on tax contingencies Today, we are beginning to see comments on FIN 48 5
SEC Comments FIN 48 We note your disclosures regarding the transfer pricing uncertainty and the various other uncertain tax positions related to federal taxes which are being discussed at the IRS Appeals level in the U.S. Tell us how you have met each of the disclosure requirements of paragraph 21(d) of FIN 48 for each significant uncertain tax position. 6
SEC Comments FIN 48 (cont d) We note your disclosures regarding the adoption of FIN 48 as of January 1, 2007. Please revise your disclosure to address whether it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date. Identify the nature of any uncertainties, the nature of the events that could occur within the next 12 months that could cause the amounts to change, and provide an estimate of the range of the reasonable possible change or state that an estimate of the range cannot be made. Refer to paragraph 21(d) of FIN 48 and the AICPA s February 2007 FIN 48 disclosure summary, which sets forth Staff views with respect to these disclosures in the initial period of adoption. 7
SEC Comments FIN 48 (cont d) We note that no disclosure was made regarding material changes in contractual obligations from the amounts that were previously reported in your Form 10-K for the year ended December 31, 2006. Please tell us how you evaluated Instruction 7 to Item 303(b) of Regulation S-K with respect to contractual obligations relating to FIN 48. We note that it does not appear that your prior disclosure of contractual obligations included amounts relating to uncertain tax positions, and we believe that such amounts represent contractual obligations that should be included in the disclosures made under Item 303(a)(5) of Regulation S-K. 8
Poll question #2 What has your organization done to cope with the increased expectations regarding transparency? Discuss disclosures with external auditor earlier in process Discuss draft disclosures with CFO earlier in process Review draft disclosures with audit committee All of the above None of the above Don t know / not applicable
Disclosures
FIN 48 Disclosure Requirements Tabular reconciliation of the total amounts of unrecognized tax benefits ( 21a) The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate ( 21b) Excludes unrecognized tax benefits relating to timing differences, business combinations, and items that, if recognized, would be credited to other comprehensive income Amount of interest and penalties recognized ( 21c) When it is reasonably possible the total amount of unrecognized tax benefits may significantly change within 12 months of the reporting date ( 21d) Nature of the uncertainty The nature of the event that could occur An estimate of the range of reasonably possible change or a statement that an estimate of the range cannot be made A description of tax years that remain subject to examination ( 21e) 9
FIN 48 Disclosure Requirements (cont d) Tabular Reconciliation of beginning and ending balances of unrecognized tax benefits ( 21a) Unrecognized tax benefits, opening balance $XX Gross increases tax positions in prior period XX Gross decreases tax positions in prior period (XX) Gross increases current-period tax positions XX Settlements (XX) Lapse of statute of limitations (XX) Unrecognized tax benefits, ending balance $XX This disclosure is required in the aggregate and will generally not equal the amount recorded as a liability for the unrecognized tax benefit in the balance sheet 10
Disclosure Trends FIN 48 (cont d) Followed FIN 48 and were clear: Open years Total unrecognized tax benefits Effective tax rate impact Policy for interest and penalty accruals May have followed FIN 48; less clear: Amounts of interest and penalties accrued Lumped together Gross versus net Early warning disclosure details per paragraph 21(d) 11
Management s Discussion and Analysis Critical Accounting Policies Management to discuss in MD&A critical accounting policies and estimates that involve significant judgment and could materially affect financial statements Liquidity Identify events, transactions and known trends that affect current and future comparability Contractual Obligations Table Include FIN 48 liabilities when a reasonably reliable estimate can be made 12
Other Disclosure Requirements FAS 109 don t forget disclosures in paragraphs 43-49 FAS 5 disclose loss contingencies for non-income tax related items FIN 45 disclose indemnifications provided SOP 94-6 disclose when it is reasonably possible that an accounting estimate will change in the nearterm Schedule II roll forward valuation and qualifying accounts 13
Poll question #3 What do you believe will be the most difficult part of developing a paragraph 21(d) disclosure for your organization? Projecting the timing of exam/appeals process completion and Joint Committee approval Calculating the amount(s) to disclose Tracking possible 21(d) amounts around the world All of the above None of the above Don t know / not applicable
Looking Forward
Looking forward plan now for: Quarterly documentation updates Financial statement presentations Gross versus net Year-end disclosure requirements Rollforward table can be created now Paragraph 21(d) disclosure and contractual obligations table additions can be discussed now Spring/summer 2008 SEC comment period FIN 48 deferral 14
Poll question #4 How beneficial has the adoption of FIN 48 been to improving your organization s understanding of its income tax uncertainties? Very beneficial Somewhat beneficial Not beneficial Don t know / not applicable
Questions & Answers
Contact info Rita Benassi rbenassi@deloitte.com 617-437-3386 Kathleen McEligot kmceligot@deloitte.com 415-783-4540 Randall Sogoloff rsogoloff@deloitte.com 203-761-3777
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Join us as our FAS 109 series presents: January 14 at 2 PM EST FIN 48 and FAS 109 Tax Accrual Workpapers: Caught Between a Rock and a Hard Place? And March 31 at 2 PM EDT Material Weaknesses and Restatements: Why Tax Is Still in the Hot Seat
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