| Summer 2007 |
Construction Advisor
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FIN 48 for Construction Contractors
The Financial Accounting Standards Board has released Interpretation
48 which is commonly called FIN 48. This interpretation is effective for
fiscal years beginning after December 15, 2006 and deals with accounting
for uncertain income tax positions. Remember it only applies to income
tax positions not such other loss contingencies for sales or franchise
tax exposures which will continue to be regulated by FAS 5.
FIN 48 impacts any company with audited financial statements that have income
tax positions recorded on their balance sheet. Income tax positions can be
federal, state, local, or foreign.
To understand FIN 48 it is imperative to understand the definition of a tax
position. FIN 48 describes this as a position on a previously filed tax return
or a position expected to be taken in a future tax return that is reflected in
measuring current or deferred income tax liabilities for interim or annual
periods. This would include items such as:
- A position taken in a previously filed income tax return.
- Any position expected to be taken in a future return.
- A decision to file or not file a return (nexus issues for states).
- Any decision to shift or allocate income among tax jurisdictions.
- Any decision or tax characterization of income (capital vs. ordinary).
- Any decision to exclude income from a return.
- Any decision to classify a transaction as tax-exempt.
Keep in mind that FIN 48 is still subjected to materiality thresholds
established in your audit.
FIN 48 requires a two-step process (recognition and measurement). The first
step is to determine if a minimum confidence level of greater than 50 percent is
met. This is known as "the more likely than not standard". If this is not met,
then zero percent of the benefit can be recognized. The second step is
measurement. This includes determining if the minimum confidence level is met
but if the confidence level overall is less than 100 percent, an adjustment
needs to be considered. This is all based on a fact and circumstance test.
The key issue in this area is supporting documentation. Properly documenting
the tax position based on facts and circumstances will generally solve financial
statement issues even if unfavorably resolved in a taxing authority examination.
Interest and penalties related to the tax position also must be considered in
your FIN 48 review.
Obviously a major concern of companies and firms is the potential impact of
the tax authorities requesting to review FIN 48 work paper documentation. This
will be played out and resolved after time.
To conclude, there are five standards to consider when examining a company's
tax position:
- It is not frivolous.
- It has a reasonable basis.
- There is a realistic possibility it will be sustained upon examination.
- There is substantial authority for the position.
- It meets the more likely than not standard.
We can help you with the proper implementation of FIN 48. For more
information, please contact Dale Ruther, Partner, at 330-255-2427 or Tara
Shulas, Tax Manager, at 330-255-2474.
The Construction Advisor is produced
quarterly by Bober, Markey, Fedorovich
& Company's Construction
Services Team. If you would like additional information about the services that
we can provide to construction companies and contractors, please call or
email our team leader, Dale A. Ruther, CPA, CIT at (330) 762-9785 or dale@bobermarkey.com.
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