Questions have been raised about the appropriate way for private companies to implement the full provisions of the Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) 740, Income Taxes, in their financial statements.
Of particular concern is the "overall" section (ASC 740-10) within that guidance, which includes the legacy document FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes.
This article addresses how most smaller private companies can implement the ASC 740 disclosure requirements.
Amended Disclosure Requirements
To appropriately implement the disclosure requirements, it is important to understand that a tax position is a position in a previously filed tax return ndash; or a position expected to be taken in a future tax return – that is reflected in measuring current or deferred income tax assets and liabilities for interim and annual periods.
A tax position can result in one of the following:
- A permanent reduction of income taxes payable
- A deferral of income taxes otherwise currently payable to future years
- A change in the expected realizability of deferred tax assets
The term "tax position" encompasses, but is not limited to:
- A decision not to file a tax return
- An allocation or a shift of income between jurisdictions
- The characterization of income, or a decision to exclude reporting taxable income, in a tax return
- A decision to classify a transaction, entity or other position in a tax return as tax-exempt
- The status of the entity, including its status as a pass-through entity or tax-exempt not-for-profit entity
Importantly, the last bullet point in the list above makes it clear that the guidance within ASC 740, where applicable, needs to be utilized in financial statements of pass-through entities (e.g., S corporations, LLCs, etc.) and not-for-profit entities.
As amended, the disclosure requirements for private companies and not-for-profit entities now do not include the tabular reconciliation disclosure that previously had been argued to be problematic for private companies, especially in circumstances where only one or a few tax uncertainties happened to exist. The disclosure reduction also eliminates the requirement to disclose the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
Private entities and not-for-profit entities do need to disclose, as of the end of each annual reporting period presented, the following:
- The total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position
- For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the financial statement date:
o The nature of tax uncertainties
o The nature of events that could occur within 12 months of the financial statement date that would cause the significant increases in unrecognized tax benefits
o An estimate of the range of the 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 by major tax jurisdictions
Example Note Disclosure
An example note disclosure that can be used in many circumstances to accomplish the disclosure objectives within ASC 740 when reporting entities have no uncertain tax positions that qualify for recognition or disclosure in the financial statements follows:
Effective Jan. 1, 2009, the Company implemented the new accounting requirements associated with uncertainty in income taxes using the provisions of Financial Accounting Standards Board ASC 740, Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial
statements when it is more likely than not that the positions will be sustained upon examination by the tax authorities. It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As of Dec. 31, 2009, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Additionally, the Company had no interest and penalties related to income taxes.
With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2006.
There is little question that challenges will need to be faced in developing disclosure requirements to comply with the provisions of ASC 740. In addition to just complying with the requirements, the variety in types of uncertain tax positions could be burdensome to both reporting entities and practitioners associated with those entities.
It is hoped that this discussion of the basics will be helpful in meeting those challenges.
