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Accounting for income taxes uncertainties
- By Daren Yeoh
- Published 1/01/2007
- Moore Tax News
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The impact of FIN 48
When Australia decided to adopt the International Financial Reporting Standards (“IFRS”), the boat left the port and there is no turning back. Therefore, whenever there is a change to the IFRS, Australian reporting entities will need to adopt the change.
In 2002, the Financial Accounting Standards Board (“FASB”) in the US and the International Accounting Standards Board (“IASB”) signed the “Norwalk Agreement” which obliged them to work on converging their accounting standards.
In July 2006, the Financial Accounting Standards Board (“FASB”) released FIN 48 ‘Accounting for Uncertainty in Income taxes’, an interpretation of SFAS 109 “Accounting for income taxes”. As part of the convergence process, it is proposed that IAS 12 and hence AASB 112 will be amended to reflect the SFAS 109 treatment of uncertain tax positions. It is anticipated that there will be significant rigmarole surrounding the ramifications of the change including whether the additional disclosures will result in increased tax audit activities.
Objective of the instrument
The objective of FIN 48 is to increase the comparability in the financial reporting of uncertain tax positions. Uncertain tax positions arise as a result of entities being uncertain as to whether a tax position they have taken will ultimately be sustained. Prior to FIN 48, there was a lack of guidance on how entities should disclose uncertain tax positions.
FIN 48 clarifies the system for accounting for income taxes by imposing a minimum recognition threshold for a tax position to be documented.
Requirements proposed by the instrument FIN 48 provides a two-step approach for recognising and measuring tax benefits. Step
one (recognition) happens when an enterprise decides that a tax position is more-likelythan-not to be sustained upon examination. Step two (measurement), occurs only if step one has been satisfied, and sees the tax benefit measured as the largest amount of benefit, determined on a cumulative probability basis that is more-likely-than-not to be realised upon settlement.
One would question whether Step one would affect a taxpayer’s argument as to whether there is a reasonably arguable position supporting the tax treatment.
FIN 48 also guides companies on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.
Impact
The regulations will add to the administrative workload. The regulations will result in increased calculations and documentation requirements that entities will need to comply with. FIN 48 applies to all tax positions, so it requires additional tracking documentation from every entity and location, meaning the impact on corporations is significant. A tax position basically means anything to do with tax including transfer pricing and
calculation of deferred tax balances.
Timing
The IASB and FASB proposed to release a joint exposure draft by late 2006 and a final standard by mid-2007. However, a draft is yet to be released and thus details of how accounting for uncertainty in income taxes will be incorporated into IAS 12 are not available. Therefore, it is difficult to comment on the extent of the impact of the changes to AASB 112 to Australian entities. However, it is important for Australian entities to be aware of the changes that are likely to come into effect some time in the near future and start to think about the implications of the change. On the brighter side,
the IASB notes on its website that it will not require the application of new IFRS’s under development or major amendments to existing standards before 1 January 2009.
If you have any queries in relation to the above, please contact Daren Yeoh on (03) 9614 4444.
When Australia decided to adopt the International Financial Reporting Standards (“IFRS”), the boat left the port and there is no turning back. Therefore, whenever there is a change to the IFRS, Australian reporting entities will need to adopt the change.
In 2002, the Financial Accounting Standards Board (“FASB”) in the US and the International Accounting Standards Board (“IASB”) signed the “Norwalk Agreement” which obliged them to work on converging their accounting standards.
In July 2006, the Financial Accounting Standards Board (“FASB”) released FIN 48 ‘Accounting for Uncertainty in Income taxes’, an interpretation of SFAS 109 “Accounting for income taxes”. As part of the convergence process, it is proposed that IAS 12 and hence AASB 112 will be amended to reflect the SFAS 109 treatment of uncertain tax positions. It is anticipated that there will be significant rigmarole surrounding the ramifications of the change including whether the additional disclosures will result in increased tax audit activities.
Objective of the instrument
The objective of FIN 48 is to increase the comparability in the financial reporting of uncertain tax positions. Uncertain tax positions arise as a result of entities being uncertain as to whether a tax position they have taken will ultimately be sustained. Prior to FIN 48, there was a lack of guidance on how entities should disclose uncertain tax positions.
FIN 48 clarifies the system for accounting for income taxes by imposing a minimum recognition threshold for a tax position to be documented.
Requirements proposed by the instrument FIN 48 provides a two-step approach for recognising and measuring tax benefits. Step
one (recognition) happens when an enterprise decides that a tax position is more-likelythan-not to be sustained upon examination. Step two (measurement), occurs only if step one has been satisfied, and sees the tax benefit measured as the largest amount of benefit, determined on a cumulative probability basis that is more-likely-than-not to be realised upon settlement.
One would question whether Step one would affect a taxpayer’s argument as to whether there is a reasonably arguable position supporting the tax treatment.
FIN 48 also guides companies on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.
Impact
The regulations will add to the administrative workload. The regulations will result in increased calculations and documentation requirements that entities will need to comply with. FIN 48 applies to all tax positions, so it requires additional tracking documentation from every entity and location, meaning the impact on corporations is significant. A tax position basically means anything to do with tax including transfer pricing and
calculation of deferred tax balances.
Timing
The IASB and FASB proposed to release a joint exposure draft by late 2006 and a final standard by mid-2007. However, a draft is yet to be released and thus details of how accounting for uncertainty in income taxes will be incorporated into IAS 12 are not available. Therefore, it is difficult to comment on the extent of the impact of the changes to AASB 112 to Australian entities. However, it is important for Australian entities to be aware of the changes that are likely to come into effect some time in the near future and start to think about the implications of the change. On the brighter side,
the IASB notes on its website that it will not require the application of new IFRS’s under development or major amendments to existing standards before 1 January 2009.
If you have any queries in relation to the above, please contact Daren Yeoh on (03) 9614 4444.
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