Academic journal article Journal of Accountancy

An Update on Accounting for Uncertainty in Income Taxes: FASB Implementation Guidance Addresses Pass-Through Entities and Tax-Exempt Not-for-Profit Organizations

Academic journal article Journal of Accountancy

An Update on Accounting for Uncertainty in Income Taxes: FASB Implementation Guidance Addresses Pass-Through Entities and Tax-Exempt Not-for-Profit Organizations

Article excerpt

EXECUTIVE SUMMARY

* Topic 740 of the FASB Accounting Standards Codification provides guidance for accounting for uncertainty in income taxes (formerly contained in FASB Interpretation no. 48). It is being implemented by private companies, including pass-through entities and tax-exempt not-for-profit organizations, in annual financial statements for periods beginning after Dec. 15, 2008.

* Entities must determine whether it is more likely than not that a tax position will be sustained upon examination and, if so, determine the amount of tax benefit to recognize in the financial statements.

* For pass-through entities and tax-exempt not-for-profit organizations, their taxable status is a tax position that must be evaluated. Even if it is determined that the entity's pass-through or tax-exempt status would be sustained, other tax positions may still need to be considered. For S corporations, an example might be built-in gains tax or, for tax-exempt not-for-profit organizations, tax on unrelated business income.

* Accounting Standards Update 2009-06 modified the Codification to provide guidance for pass-through entities and tax-exempt not-for-profit organizations with respect to the definition of a tax position, attribution of income taxes to the entity or its owners, and the financial statements of a group of related entities, It also eliminated some disclosure requirements for these and other nonpublic entities with respect to unrecognized tax benefits.

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[ILLUSTRATION OMITTED]

Preparers of private company and not-for-profit organization financial statements will have to implement provisions of Topic 740 of the FASB Accounting Standards Codification (ASC) relating to accounting for uncertainty in income taxes (formerly FASB Interpretation no. 48, commonly known as FIN 48) for annual financial statements for periods beginning after Dec. 15, 2008. This article addresses some considerations in implementing Topic 740 relating to accounting for uncertainty in income taxes, with an emphasis on pass-through entities and tax-exempt not-for-profit organizations.

FIN 48 was effective for fiscal years beginning after Dec. 15, 2006, and included pass-through entities and tax-exempt not-for-profit organizations within its scope, even though these types of entities are not typically subject to income taxes. As a result, many questions arose about how pass-through entities and tax-exempt not-for-profit organizations were to apply this standard. FIN 48 did not provide any relevant examples.

In September 2007, after conducting outreach to its constituents, the Private Company Financial Reporting Committee (PCFRC) recommended that FASB defer FIN 48's effective date for nonpublic entities until clarification and guidance were issued on its implications for pass-through entities. In addition, the PCFRC asked the board to consider the usefulness of FIN 48's disclosure requirements for private companies. In May 2008, after further outreach to preparers and users of private company financial statements, the PCFRC recommended that FASB exempt private companies from FIN 48. In response, FASB convened a "user panel" in August 2008 consisting of bank lending officers, sureties and venture capitalists. The board declined to exempt private companies and not-for-profit entities from FIN 48. However, as a result of the input from the user panel, the board decided to modify the disclosure requirements for nonpublic entitles. Accounting Standards Update (ASU) 2009-06, issued Sept. 2, 2009, modified the ASC to provide the needed guidance and eliminate certain disclosures for nonpublic entities relating to unrecognized tax benefits.

Topic 740 prescribes how to account for uncertainty in income tax positions taken or expected to be taken in a tax return. Evaluating a tax position is a two-step process. An entity first determines whether it is "more likely than not" (MLTN) that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. …

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