The Financial Accounting Foundation has conducted its first post-implementation review of an accounting standard, starting with FIN 48, “Accounting for Uncertainty in Income Tax Positions,” and found it generally achieved its purpose, though it still needs some improvement.
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In a report Thursday on the standard, the FAF, which oversees the Financial Accounting Standards Board, found that the 2006 standard generally meets its goal of increasing the relevance and comparability in reporting information about income tax uncertainties.
But the report, which was compiled by an independent committee appointed by the FAF board of trustees, also found from interviews with various stakeholders that consistently applying FIN 48’s guidance may not increase the comparability of information about income tax uncertainties across companies and other reporting entities.
“The principal reasons comparability may not be increased are managements’ judgments and tax code complexity,” said the report. “Management has to assess each tax position separately on its technical merits, assuming taxing authorities’ full knowledge of the positions. Different judgments may result in different reported outcomes, even for similar uncertain income tax positions.”
The committee found that reported information about income tax uncertainties has become more relevant since FASB issued Financial Interpretation 48 in 2006. But the information it provides “may not be predictive or confirmatory of future cash flows because FIN 48 employs a benefit-recognition approach, not a best-estimate approach for liabilities to be settled.” Overall, the report found that the benefits of FIN 48’s improved consistency and reporting of income tax uncertainty information outweigh its costs.
The report on FIN 48 is the first of a series of post-implementation reviews that the FAF plans to conduct of standards set by both FASB and the Governmental Accounting Standards Board, which the FAF also oversees.
“The issuance of this report is really a milestone for our organization,” FAF president and CEO Terri Polley said in an interview with Accounting Today. “It’s a really good example of the FAF board of trustees’ oversight. They had decided to create this independent process for looking at the FASB and GASB standards after they’ve been issued to check on their effectiveness and how the standards are being used. It shows our willingness to take a look at what we do and how we can improve upon our process.”
The study found that FIN 48 resulted in more information being reported than under prior accounting, she noted, and investors are generally using that information in their investment decision processes. While the report noted that the benefits of the improved consistency and relevancy provided to investors outweighed the costs, in some cases companies needed to hire outside advisors to help them determine those costs.
“Our general findings indicated that most preparers have not incurred significant incremental costs due to FIN 48, but certainly some of the smaller organizations have incurred some extra costs for legal and accounting advice, audit fees and things like that,” said Polley.
FIN 48 and the Internal Revenue Service’s Schedule UTP for reporting uncertain income tax positions have attracted controversy and some pushback from companies that resisted reporting on questionable tax strategies. In 2010, the IRS agreed to relax some of its requirements and phase them in over five years (see IRS Scales Back Uncertain Tax Position Requirements). While the FAF report does not delve much into the IRS requirements, the review team did hear about some of those problems in relation to FIN 48. The report found that preparers are concerned that Schedule UTP could lead to adverse audit and settlement consequences.
“In our surveys and questionnaires, we asked questions around that point,” said Mark Schroeder, who headed the post-implementation review process for the FAF. “Generally there was not a significant change in behavior in the taxing authority’s method for settling tax disputes. The Schedule UTP form from the IRS just became effective in 2010, so there’s still no actual data on whether there will be further economic cost as a result of that form. But generally we did not see any general movement, according to our surveys and questionnaires, in whether they were changing their tax strategies. There were some that may have, and if they did there may have been a slight tendency to become more conservative, but there were other things going on at the time that may have affected that behavior. For example, the IRS changed its rules on ethics for practicing before the IRS and its registration rules for tax shelters, and there was Sarbanes-Oxley, so all of those factors may have gone into changing tax behavior.”
Any changes in FIN 48 are still unclear. FASB will look at the post-implementation review report and provide a written response in the next few weeks on what the board plans to do, Polley noted. The post-implementation review process itself was also something that the FAF wanted to try out.
“Ultimately we believe that good financial reporting leads to lower cost of capital,” said Polley. “But it’s always a challenge to do a thorough assessment of the costs and benefits.”
FASB and the International Accounting Standards Board also plan to conduct post-implementation reviews of the converged accounting standards once they take effect, although FIN 48 is only a FASB standard.
“In this case income tax is not a converged area, but in other areas it would make sense to talk with the IASB to compare the issues they’ve seen,” said Polley.
The FAF has not yet decided which standards from FASB and GASB will be the next ones slated for a post-implementation review, but Polley expects to announce in the next few weeks which standards have been selected.
The FAF has also been receiving a steady stream of input on its proposal for a Private Company Standards Improvement Council to replace the Private Company Financial Reporting Committee (see FAF Proposes New Council for Private Company Accounting Standards). The American Institute of CPAs has been encouraging CPAs and state CPA societies to prod the FAF to go beyond the current proposal and set up a separate board for private company standards, independent of FASB (see AICPA Renews Campaign for Private Accounting Standards Board). The current proposal gives FASB the ability to ratify or reject any changes in accounting standards for private companies recommended by the council.
Polley said that as of Wednesday morning, the FAF had received over 6,000 comment letters. While the comment deadline on the FAF proposal will be up on Jan. 14, Polley noted that the FAF also has roundtables scheduled in various cities around the country to elicit further input on its proposals in the next few months. Polley anticipates the FAF trustees will make a decision by early spring on the final structure of the proposed council, but she declined to speculate on what they would ultimately decide. “I’m not a decider,” she said. “They’re the deciders.”