The Financial Accounting Standards Board issued an interpretation that clarifies the way companies account for uncertainty in income taxes.
Accounting for uncertainty in income taxes -- which is based upon validity of a tax position -- is now subject to a number of interpretations that have resulted in diverse and inconsistent accounting practices and measurements. The hope is that the new guidance will increase the relevancy and comparability of financial reporting and will also likely lead to companies now disclosing, "more likely than not" tax positions, which, encompass a wide range of positions with so much uncertainty that a company does not take a full financial benefit on statements.
FASB Statement No. 109, "Accounting for Income Taxes," prescribes a consistent recognition threshold and measurement attribute, as well as criteria for recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes.
"Today's interpretation reflects our concerns that widespread diversity in practice, including inconsistent measurement associated with uncertainty in accounting for income taxes, has resulted in less relevant, less comparable and less complete information for investors and other users of financial statements," said board member Edward W. Trott, in a statement.
The interpretation, which incorporates comments received from FASB constituents, as well as views expressed during a public roundtable, is effective for fiscal years beginning after Dec. 15, 2006.
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