FIN 48 Disclosures: The Questions Keep Coming!

Many questions have arisen regarding the situation when an entity has evaluated all of their income tax positions and concluded that no uncertain income tax positions exist. Although there is no requirement within FASB ASC 740, Income Taxes, (or any other part of U.S. GAAP) to disclose the fact that no uncertain income tax positions exist, many entities prefer to disclose this fact at least in the year of initial adoption of this guidance.

Note that FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes, was issued in July 2006 and was effective for fiscal years beginning after December 15, 2006, but its application was delayed for nonpublic companies until fiscal years beginning after December 15, 2008. FIN 48 is now codified in FASB ASC 740, Income Taxes. The guidance from FIN 48 applies to all tax positions accounted for under FASB ASC 740.

With all of the quesitons that are out there, we have written a new whitepaper that addresses what needs to be done with respect to FIN 48 disclsoures. This whitepaper specifically addresses the sistuation where an entity does not have any uncertain tax positions and also provides examples for pass-through entities and tax exempt entities. It's available FREE of charge! Just contact us at russ@madray.com and we'll send you a FREE copy.

Negative Minority Interest?

See if this sounds familiar…a parent company has a very large negative balance and the noncontrolling interest is at or close to zero, because the parent has been absorbing all of the excess losses to date.

Several clients have asked whether under FASB Statement 160 (FASB ASC 810), the parent will have the opportunity to record all future net income until the parent’s balance recoups the recorded excess losses to date before sharing the net income pro rata with the NCI. This accounting was appropriate under the “old way” and seems unfair to the parent under the “new way” if the parent doesn’t have the opportunity to recoup excess losses first.

Although the answer may not seem “fair,” FAS 160 was pretty clear about this issue. Specifically, FAS 160 amended ARB 51 to require a parent to allocate losses to the noncontrolling interest even if the noncontrolling interest has a deficit balance. Under the old guidance, a parent would cease allocating losses of a subsidiary to the minority interest if the carrying value of the minority interest was reduced to zero. Here’s the old language from paragraph 15 of ARB 51:

In the unusual case in which losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, such excess and any further losses applicable to the minority interest should be charged against the majority interest, as there is no obligation of the minority interest to make good such losses. However, if future earnings do materialize, the majority interest should be credited to the extent of such losses previously absorbed.

Here’s the new language from paragraph 31 of ARB 51 (as amended by FAS 160; now codified in FASB ASC 810-10-45-21):

Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the noncontrolling interest, shall be attributed to those interests. That is, the noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.

Bottom line = in the circumstance where a parent has ceased allocating losses to a noncontrolling interest because the noncontrolling interest has been reduced to zero, the parent should begin allocating losses to the noncontrolling interest upon the adoption of FAS 160. There is no adjustment for previous unallocated losses. There is also no future recapture of losses absorbed by the parent when the subsidiary generates profits.

What a Surprise! The IRS is Interested in FIN 48!

On January 26, 2010, the IRS released Announcement 2010-9, which announces the development of a tax return schedule to facilitate the disclosure of information with respect to uncertain tax positions. As announced, the new disclosure requirement would apply to public and private companies with assets over $10 million that have financial statements prepared under FIN 48 reflecting uncertain tax positions. The proposed effective date would be for returns filed after the release of the new schedule. However, the IRS will provide that it will not apply to tax returns related to 2009.

Companies would be required to provide a concise description of each uncertain tax position for which the taxpayer or related entity has recorded a reserve in its financial statements and the maximum potential federal tax liability attributable to each uncertain tax position. This disclosure would be made on the schedule currently being developed by the IRS. In defining “uncertain tax positions” for which disclosure would be required, Announcement 2010-9 includes a position related to the determination of federal income tax liability for which a reserve was not established because the taxpayer expected to litigate the position or because the taxpayer determined that the IRS has a general administrative practice not to examine the position.

In a speech, IRS Commissioner, Douglas Shulman, stressed that with respect to the concise statement of the issue, the IRS means a few sentences that inform the Service of the nature of the issue rather than pages of factual description or legal analysis. However, Announcement 2010-9, which further clarifies the description requirements, requires significant information.

Stay tuned!

The “Un-Disclosure”

Lately, I’ve been getting a lot of questions related to FIN 48, Accounting for Uncertainty in Income Taxes (now codified as FASB ASC 740-10). One question, in particular, seems to keep coming up. It goes something like this: “What kind of disclosure do I need to include in the notes if we have adopted FIN 48, but we have determined that there are no uncertain income tax positions.”

The simple answer is: no disclosure! Think about that for a minute…we generally don’t sit around trying to think of the proper disclosure for all of the thousands of GAAP requirements that don’t apply to a particular entity. But, for some reason, we seem to look at FIN 48 differently. The bottom line is this: neither FIN 48, nor any other accounting pronouncement, requires you to disclose the fact that it does not apply.

Even the FASB is on record stating that to do so with respect to FIN 48 would set a dangerous precedent for requiring a similar disclosure with respect to all accounting standards for which there is no material effect on the financial statements.

So, relax…no need to disclose the fact that FIN 48 doesn’t apply or that there are no uncertain income tax positions.

I guess silence really is golden!

It's Deja Vu All Over Again!

A blue-ribbon panel will look into whether private U.S. companies should get their own version of accounting rules. The panel is sponsored by the American Institute of Certified Public Accountants, the Financial Accounting Foundation, and the National Association of State Boards of Accountancy. Announced last month, the panel will explore the process of accounting standard-setting for private companies and recommend whether they need their own version of generally accepted accounting principles.

The panel's members, who will be named in January, will include lenders, investors, owners, preparers, auditors, and regulators. NASBA president and CEO David Costello says the sponsoring group has yet to decide on the time frame for when the panel needs to make its final recommendations, but that the group will likely seek input from the public.

Other groups have addressed the question of whether private companies need a "little GAAP." The Financial Accounting Standards Board has previously balked at the notion, but it has co-sponsored, along with the AICPA, the Private Company Financial Reporting (PCFR) Committee, which has been providing input to the standard-setting process on behalf of private companies.
The debate intensified earlier in this decade as financial reporting became more onerous for public companies following the collapse of Enron and the passage of the Sarbanes-Oxley Act. The resulting increased scrutiny by auditors spilled over to private companies, which have reported their audit fees rising along with their expense of following GAAP.

Moreover, the changes have created a disparity between the needs of private- and public-company investors. The proliferation of rules out of FASB is basically being driven by public-company investors. Because of Regulation FD, they don't have the ability that private-company users of financial information have, to call up a company and ask questions. They want more and more disclosure and information in the financial statements that the users of private-company financials really don't need.

In addition, the new blue-ribbon panel will have to broach the subject of IFRS, which has its own separate set of guidelines for private companies. Released over the summer, "IFRS Light" offers small and midsize companies a slimmed-down version of international reporting standards and the promise that they'll be revised only once every three years.

Stay tuned!