FASB Interpretation No' 48

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FASB Interpretation No. 48

• An Interpretation of FASB Statement No. 109
• Royce W. Mitchell

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Purpose and Objectives

• Reasons for issuance
• The scope of the interpretation
• The Two-Step process
• Recognition and the more-likely-than-not
  benchmark
• Measurement of benefit to be recognized
• Disclosure requirements
• Effective date and transition

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Reasons for Issuance

• Statement 109 contains no specific guidance on
  uncertainty
• Significant diversity in practice
• Lowest common denominator accounting

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Scope

• All tax positions accounted for under Statement
  109
• Applies to past returns filed and future returns
  to be filed
• Federal and state income tax positions
• Interim and annual periods

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Two-Step Process

• Recognition
• More-likely-than-not standard
• Likelihood of more than 50 percent that the tax
  position will be upheld upon examination
• Requires positive assertion by Company
• Considers facts, circumstances and information
  available at reporting date
• Presumes examination and consideration of
  precedents
• Each position examined on its on no offsets
• Determination of unit-of-measure

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Two-Step Process

• Measurement
• Largest amount of tax benefit that meets the
  more-likely-than-not standard
• Considers amounts and probabilities of outcomes
  that could be realized
• Measurement done within unit of measure for each
  tax position

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Measurement Example
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Other Consideration

• Tax planning strategies
• Subsequent changes in circumstance
• MLTN threshold met
• Tax matter settled
• Statute of limitations passed

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Changes in Judgment

• Result of evaluation of new information
• Not from new evaluation or new interpretation by
  management
• Discreet item in period change occurs

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Interest and Penalties

• Start accruing interest in first period required
  by relevant tax law
• Penalties accrued if position does not meet
  minimum statutory requirement

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Classification

• Liability associated with aggressive tax position
  not deferred tax liability
• Classified as current or long-term like any other
  liability
• Accounting policy elections-
• Interest classified as interest or income tax
• Penalties classified as income tax or another
  expense classification

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Disclosures

• Tabular disclosure
• Unrecognized tax benefits that would affect the
  effective tax rate
• Interest and penalties recognized in income
  statement
• Reasonably possible changes in unrecognized
  benefits in next 12 months
• Nature of uncertainty and event in next 12 months
• Range of reasonably possible change
• Tax years subject to examination by tax year
• Policy on classification of interest and penalties

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Tabular Disclosure

• Tabular reconciliation for each period presented
• Gross amounts of increases/decreases in
  unrecognized tax benefits as a result of tax
  positions taken in prior years
• Gross amounts of increases/decreases in
  unrecognized tax benefits as a result of tax
  positions taken in current year
• Decreases in unrecognized tax benefits as a
  result of settlements with taxing authorities
• Decreases in unrecognized tax benefits due to
  lapse of statute of limitations

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Disclosures

• Tabular disclosure
• Unrecognized tax benefits that would affect the
  effective tax rate
• Interest and penalties recognized in income
  statement
• Reasonably possible changes in unrecognized
  benefits in next 12 months
• Nature of uncertainty and event in next 12 months
• Range of reasonably possible change
• Tax years subject to examination by tax year
• Policy on classification of interest and penalties

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Illustrative Disclosure pp A33

• The Company or one of its subsidiaries files
  income tax returns in the U.S. federal
  jurisdiction, and various states and foreign
  jurisdictions. With few exceptions, the Company
  is no longer subject to U.S. federal, state and
  local, or non-U.S. income tax examinations by tax
  authorities for years before 2001. The Internal
  Revenue Service (IRS) commenced an examination of
  the Companys U.S. income tax returns for 2002
  through 2004 in the first quarter of 2007 that is
  anticipated to be completed by the end of 2008.
  As of December 31, 2007, the IRS has proposed
  certain significant adjustments to the Companys
  transfer pricing and research credits tax
  positions. Management is currently evaluating
  those proposed adjustments to determine if it
  agrees, but if accepted, the Company does not
  anticipate the adjustments would result in a
  material change to its financial position.
  However, the Company anticipates that it is
  reasonably possible that an additional payment in
  the range of 80 to 100 million will be made by
  the end of 2008.
• The Company adopted the provisions of FASB
  Interpretation No. 48, Accounting for Uncertainty
  in Income Taxes, on January 1, 2007. As a result
  of the implementation of Interpretation 48, the
  Company recognized approximately a 200 million
  increase in the liability for unrecognized tax
  benefits, which was accounted for as a reduction
  to the January 1, 2007, balance of retained
  earnings. A reconciliation of the beginning and
  ending amount of unrecognized tax benefits is as
  follows
• (in millions)
• Balance at January 1, 2006
  370,000
• Additions based on tax positions related
  to the current year
  10,000
• Additions for tax positions of prior
  years 30,000
• Reductions for tax positions of prior years
  (60,000)
• Settlements (40,000)
• Balance at December 31, 2007
  310,000
• 
  
  
• Included in the balance at December 31, 2007, are
  60 million of tax positions for which the
  ultimate deductibility is highly certain but for
  which there is uncertainty about the timing of
  such deductibility. Because of the impact of
  deferred tax accounting, other than interest and
  penalties, the disallowance of the shorter
  deductibility period would not affect the annual
  effective tax rate but would accelerate the
  payment of cash to the taxing authority to an
  earlier period.
• The Company recognizes interest accrued related
  to unrecognized tax benefits in interest expense
  and penalties in operating expenses. During the
  years ended December 31, 2007, 2006, and 2005,
  the Company recognized approximately 10, 11,
  and 12 million in interest and penalties. The
  Company had approximately 60 and 50 million for
  the payment of interest and penalties accrued at
  December 31, 2007, and 2006, respectively.

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Effective Date and Transition

• Fiscal years beginning after December 15, 2006
• Earlier adoption encouraged
• Cumulative effect applied to opening retained
  earnings
• Disclosure in balance sheet only in year of
  adoption

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Consideration and Near Term Actions Steps

• Senior management and the board should consider
• Does the Company have adequate internal controls
  to support the process of identifying and
  continually evaluating all tax positions?
• Does the Company have sufficiently competent
  personnel to perform control procedures and
  oversee processes?
• Is use of outside professionals adequate to
  achieve adequate control procedures and overcome
  lack of internal trained personnel?
• What outside professionals to consult? Tax
  professional with audit firm or not?

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Consideration and Near Term Actions Steps

• Need to begin process of identifying all tax
  positions
• Disclosure considerations for 12/31/06 financial
  statements
• Work needs to be completed, at a minimum, prior
  to reporting on 1st quarter of 2007 for public
  companies
• Private companies have more time

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Consequences

• Less flexibility for management in determining
  reserves for tax exposures
• Increased disclosure to public of tax exposures
• Could trigger detailed questions from analysts
• Attention from IRS?
• Greater income statement volatility as
  managements assessments of issues changes
• Will it make companies more risk averse?

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SEC Guidance

• No preferability letter for change in
  classification of interest and penalties
• Tabular presentation not required until year-end

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Review

• Reasons for issuance
• The scope of the interpretation
• The Two-Step process
• Recognition and the more-likely-than-not
  benchmark
• Measurement of benefit to be recognized
• Disclosure requirements
• Effective date and transition

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Questions