Don't Miss the FIN 48 Disclosure Requirement!

On December 30, 2008, the FASB issued FASB Staff Position (FSP) No. FIN 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises. This FSP defers the effective date of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, for certain nonpublic enterprises. However, nonpublic enterprises that applied the recognition, measurement, and disclosure provisions of FIN 48 in a full set of annual financial statements issued prior to the issuance of this FSP are not eligible for the deferral. The deferred effective date is intended to give the FASB additional time to develop guidance on the application of FIN 48 by pass-through entities and not-for-profit organizations. The deferred effective date also will give the FASB time to amend the disclosure requirements of FIN 48 for nonpublic enterprises.

Of particular importance for 2008 year-end financial statements is paragraph 10 of the FSP. It states:

A nonpublic enterprise that elects to defer the application of Interpretation 48 in accordance with this FSP shall explicitly disclose that fact and shall disclose its accounting policy for evaluating uncertain tax positions for each set of financial statements where the deferral applies. (emphasis added)

In an effort to find additional guidance on this issue, I contacted the FASB to inquire if the FASB had developed an illustrative disclosure. Here is the answer given by FASB communications manager, Christine Klimek:

We have not developed a sample disclosure.

There are two required disclosures. One indicates that the entity has not implemented FIN 48 if it hasn’t. The other disclosure requires entities that have not yet applied FIN 48 to describe what policy they use instead to evaluate uncertain tax positions. That note will depend on the policy in use and will vary.

Since private companies are using FAS 5, Accounting for Contingencies, for evaluating contingencies, and since an uncertain tax position is a contingency (you don’t owe it unless you’re audited), that is likely to be the most common policy. How it is worded is up to the preparer.

Given this response from the FASB, I have developed an example of a note disclosure that meets the requirement in the FSP. Contact me (russ@madray.com) if you would like a copy of this note. This note would typically be included in the first note, “Summary of Significant Accounting Policies.”

NOTE: If you conclude that FIN 48 will not apply to a particular entity (e.g., an S-Corp with no potential entity-level income tax liability), there is no requirement to elect this deferral, nor is there any requirement to state that FIN 48 does not apply.