Following on the heels of its Staff Position on Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, the FASB has issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation clarifies the manner in which companies account for uncertainty in income taxes, something for which the accounting for income tax standard, FAS 109, does not provide guidance.
Once it has determined that the “more likely than not” standard is met, the company must measure the tax position to determine the amount of the benefit to be recognized in its financial statements. Here is where the process gets a bit funky, and is another measurement tool of which the FASB should be proud. According to FIN 48, the tax position is measured “at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.” Yeah, right.
Essentially, this process represents a probability tree analysis with which many of us are familiar. No problem, just do the probabilities and related math associated with each potential amount, right? Easier said than done. Once you have determined the weighted probabilities, you have to rank order the amounts, beginning with the amount with the highest probability of occurrence. You then begin to add up the individual probabilities starting at the top with the largest tax amount. Once the cumulative percentages add to more than 50%, the amount associated with the probability percentage that pushed the total past 50% is the amount booked. Full employment for accountants rocks!
FAS 109 enable your tax department to focus more time on high value planning and less time on compliance and calculations.
Posted by: Lucy | August 10, 2006 1:10 PM | Permalink to Comment