• FASB Meeting Provides Clues on Accounting for Uncertain Tax Positions
  • January 4, 2006 | Author: Todd B. Reinstein
  • Law Firm: Pepper Hamilton LLP - Washington Office
  • As discussed in our August 2005 Tax Update, the Financial Accounting Standards Board (FASB) issued an exposure draft of a proposed interpretation of FAS 109 on accounting for uncertain tax positions. In response to the exposure draft, FASB has received a number of comment letters regarding the mechanics laid out in the exposure draft, which they are currently assessing before working guidance is issued (projected to be some time next year).

    At a meeting on November 22, FASB publicly acknowledged that it will be changing some of the standards provided for in the exposure draft. Notably, the requirement that the best estimate of the impact of a tax position be recorded only if that position "is probable of being sustained on audit based solely on the technical merits of the position" will be changed in the forthcoming guidance. The FASB accountants suggested that the guidance may adopt a lesser "more likely than not" standard when assessing the technical merits of the tax position.

    This represents a fairly significant shift in policy because the former standard was viewed by most tax practitioners as a "should" standard (between 75 and 80 percent chance of success on audit), as opposed to the proposed revised standard of "more likely than not" (typically viewed as a greater than 50 percent chance of success on audit). As a practical matter, taxpayers with tax issues that tend to be the "gray" areas of the law with little guidance and no real precedents may benefit from the revised standard, whereas, under the prior proposed standard, they probably would not have been able to obtain an opinion at a "should" level.