News Release 01-12-12


FASB Standard on Uncertain Income Tax Positions Generally Achieved Its Purpose, FAF Review Team Concludes

Report Also Notes That Some Stakeholders Believe FIN 48 Could Be Improved

Norwalk, CT, January 12, 2012—
A 2006 accounting standards interpretation intended to increase relevance and comparability in reporting information about income tax uncertainties generally achieves that purpose, although some stakeholders believe the standard could be improved.

That was the overall conclusion of the first formal “post-implementation review” of an accounting standard set by the Financial Accounting Standards Board (FASB) under a new review process established by the Financial Accounting Foundation (FAF). The FAF oversees the FASB and its sister standard setter, the Governmental Accounting Standards Board (GASB).

The review of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) (codified in Accounting Standards Codification Topic 740, Incomes Taxes), was undertaken by an independent FAF team working under the oversight of the FAF Board of Trustees. The team’s formal report was issued today and is available at:

“The post-implementation review process is designed to obtain real-world feedback on the application, usefulness, and effectiveness of standards set by our Boards,” said FAF Chairman John J. Brennan. “We are pleased with the review process—and the amount, diversity, and quality of the stakeholder feedback we received during our inaugural project.

“That feedback indicated that FIN 48 generally is working as intended, although we note that some stakeholders have suggested that it could be improved. The review team’s observations and recommendations, accompanied by stakeholders’ valuable comments and suggestions, will further assist the FAF in improving the standard-setting process,” Brennan said.

FASB Chairman Leslie F. Seidman said, “Post-implementation review is an important feedback loop in the standard-setting process. I believe that the report on FIN 48 affirms the overall effectiveness of the reporting requirements and the FASB’s processes, while identifying suggestions for improvement. FASB members will consider the reported findings and provide a written response in the coming weeks.”

The FAF FIN 48 review team received input from investors and other financial statement users, preparers, accounting practitioners, academics, and financial regulators. Based on its research, the review team concluded that:

  • FIN 48 has resulted in more information about uncertain income tax positions being reported than had been the case before its implementation.
  • Investors generally are using the improved information in their investment decision process.
  • Financial statement preparers are accounting for and reporting income tax uncertainties more consistently and such information is more relevant than it had been prior to FIN 48.
  • On balance, the benefits that FIN 48 provides to investors in the form of improved consistency and reporting of income tax uncertainties outweigh its costs.
The report provided a summary of stakeholder comments on FIN 48’s effectiveness, which were made in response to the following questions:

  • Does FIN 48 Provide Decision-Useful Information? Investors and other financial statement users believe FIN 48 generally provides useful information and public companies have increased the amount of information provided about income tax uncertainties. Preparers said, however, that they are concerned that the judgments involved in accounting for income tax uncertainties result in information that is not comparable, and may not represent amounts expected to be paid
  • Does FIN 48 Work in Practice? While preparers generally understand FIN 48’s provisions and are able to apply them, they said that difficulties arise in making judgments about outcomes applied to complex, and often vague, tax codes and practices.
  • Did FIN 48 Result in Unexpected Changes in Practice? As expected, preparers and practitioners said that they changed some operating practices to implement FIN 48. The most common changes were employing additional tax specialists, engaging tax advisors, and changing the level of coordination between tax and other functions. Relatively few preparers said that they changed their tax strategies for FIN 48 reasons.
  • Did FIN 48 Result in Significant Implementation Costs? Most preparers said that they did not incur significant FIN 48 implementation and continuing compliance costs. However, some preparers, particularly those from smaller organizations said they incurred significant costs such as additional audit fees, external legal and accounting expertise, and documenting existing tax positions
  • Did FIN 48 Result in Any Significant Economic Consequences? Preparers said that they did not experience any significant capital market effects or effects on entity valuations attributable to FIN 48’s implementation and disclosures. Users said that they did not perceive any significant capital market effects, or effects on entities’ valuations, attributable to FIN 48.
The Trustee’s oversight responsibility does not extend to recommending standard-setting action, which is the sole, independent responsibility of the FASB. To improve the standard-setting process, the post-implementation review team recommended that the FASB:

  • Continue its efforts to improve user input in the agenda and early deliberation phases to evaluate alternatives addressing user needs
  • Include in each standard a thorough discussion about the need for new financial reporting guidance and the benchmark characteristics of useful financial information considered
  • Include in each standard a thorough discussion about the new guidance’s benefits and beneficiaries, the associated costs to affected principal stakeholders, and how benefits and costs are evaluated and assessed
  • Follow consistently its established policies and procedures related to re-exposing all or part of a proposed standard.
The FASB issued FIN 48 in June 2006 to reduce diversity in practice in recognizing, measuring, and reporting uncertainties relating to income tax positions.

The post-implementation review process is designed to be independent of the standard-setting process of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The FAF review staff reports to the Trustees and FAF president, but members are drawn from experienced FASB and GASB staff to promote a collaborative review process aimed at improving the standard-setting process. The review staff tested the initial review process by selecting one FASB and one GASB standard, with the FIN 48 standard as the first test.

About the Financial Accounting Foundation

The FAF is responsible for the oversight, administration, and finances of both the Financial Accounting Standards Board (FASB) and its counterpart for state and local government, the Governmental Accounting Standards Board (GASB). The Foundation is also responsible for selecting the members of both Boards and their respective Advisory Councils.