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An Overview of FIN 48: Accounting for Uncertain Income Tax Positions

BY Peter H. Gruen
August 29, 2007

In an effort to increase comparability and consistency in how companies report income tax positions on financial statements, the Financial Accounting Standards Board ('FASB') issued on July 13, 2006 FASB Interpretation Number 48 ('FIN 48'), Accounting for Uncertainty in Income Taxes. FIN 48 changes the way companies must account for uncertain tax positions taken on federal, state and local, and international income tax returns for financial reporting purposes. Despite the requests for delay by numerous companies and trade and lobbying groups, the provisions of FIN 48 became effective for fiscal years beginning on or after Dec. 15, 2006. The provisions of FIN 48 apply broadly to all companies that issue financial statements in accordance with generally accepted accounting principles ('GAAP') and that are potentially subject to federal, state and local, or foreign income taxes.

Background

FIN 48 shifts the way companies must evaluate tax positions for financial reporting purposes from a contingent-liability model to a benefit-recognition model. Prior to the enactment of FIN 48, the tax benefits of a tax position taken on an income tax return were generally recognized in a company's financial statements. Companies then accounted for uncertain income tax positions using the contingent-liability model set forth in Financial Accounting Standard 5 ('FAS 5'), Accounting for Contingencies. Only income tax positions judged to be uncertain were evaluated under FAS 5, and a loss contingency was booked only when it was probable that the tax benefit resulting from the tax position would be lost if challenged and the amount of such loss could be reasonably estimated.

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