Guidance on FASB Interpretation No. (FIN) 48 – Accounting for Uncertainty in Income Taxes


Income tax laws very widely among the federal government, various states and international jurisdictions. Also, these tax laws are in many cases extremely voluminous, complex and at times ambiguous. Given the levels of ambiguity, volume of tax laws and lack of specific accounting guidance in the area, it stands to reason that there is a great deal of diversity in how companies treat certain tax transactions and more importantly, how companies account for uncertain tax positions. As FASB Statement No. (FAS) 109 Accounting for Income Taxes does not contain specific guidance on how to address uncertainty in accounting for income tax assets and liabilities, the Financial Accounting Standards Board (FASB) staff developed and issued Financial Interpretation Number 48 (FIN 48) to address the diversity in practice of companies and to clarify the accounting for such uncertainty in income taxes. On July 13, 2006 the FASB issued the final interpretation, Accounting for Uncertainty in Income Taxes.

The FASB believes that this interpretation will improve comparability in financial reporting of income taxes as it will ensure that all tax positions accounted for in accordance with FAS 109 will be evaluated for recognition, derecognition and measurement using consistent criteria. This guidance applies to all tax positions that a company has taken or expects to take on a tax return (including a decision that the company has made whether or not to file a tax return in a specific tax jurisdiction). Under this literature, the accounting treatment will follow the expected tax consequences of all tax positions assuming that the taxing authority has full knowledge of the tax position taken with all relevant facts without considering the likelihood that the taxing authority would have otherwise become aware of all relevant facts.

This interpretation is effective for fiscal years beginning after December 15, 2006 and is likely to cause more volatility in the financial statements as more items will be specifically recognized and potentially de-recognized in subsequent periods. Also, the annual disclosure requirements will now include a tabular roll forward of unrecognized tax benefits.


This interpretation applies to all tax positions accounted for in accordance with FAS 109 and applies to all enterprises, including pass through entities such as “S” Corporations. The term tax position refers to a position that has either already been taken in a previously filed tax return or one that is reflected in the deferred tax balances to be taken on a future tax return. The tax position includes, but is not limited to the following: a decision not to file a return, an allocation or shift of income between tax jurisdictions, a characterization of income or a decision to exclude reporting taxable income in a tax return or a decision to classify an item, position or entity as tax exempt. FIN 48 does not apply to taxes that are not within the scope of FAS 109, such as sales and use, value-added, and other taxes that are not based substantially on income. FIN 48 effectively amends FAS 5 relating to income taxes. FIN 48 is intended to be the primary literature for accounting for uncertainty in income taxes, including income tax positions assumed in a business combination.

Summary of the Guidance 

Unit of Account
Excerpt from FIN 48, paragraph 5.

The appropriate unit of account for determining what constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The determination of the unit of account to be used in applying the provisions of this Interpretation shall consider the manner in which the enterprise prepares and supports its income tax return and the approach the enterprise anticipates the taxing authority will take during an examination.


The unit of account must be established for a particular tax position and should be consistent from period to period unless facts and circumstances change. The unit of the account as mentioned in paragraph 5 from FIN 48 above is based on the level at which the enterprise prepares and supports the amounts claimed in the tax return and is representative of the approach that the enterprise anticipates that the relevant tax authority will take in an examination. The selection of the unit of account can have a significant impact on the financial results as the more-likely-than-not threshold described in FIN 48 is applied at the account level. FIN 48 provides an example highlighting how an enterprise may evaluate the unit of account in the appendix.

FIN 48 requires a two-step approach to evaluating a tax position. The first step is recognition. FIN 48 specifies that an enterprise shall initially recognize in its financial statements the effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The recognition threshold is met when a tax position (determined at the unit of account level), based on its technical merits is more-likely-than-not (defined as having its likelihood greater than 50%) to be sustained upon examination.

In making this determination, the Company should assume that the taxing authority will have full knowledge of all relevant facts and information regardless of whether the enterprise believes that the possibility of examination or of discovery upon examination is remote.

The second step in the two-step approach required by FIN 48 is measurement. Only those tax positions that meet the more-likely-than-not threshold should be measure in the financials. FIN 48 requires that the tax position be measured at the largest amount of tax benefit (ultimate settlement) that is more-likely-than-not of being realized with the taxing authority. Determining the amount of an expected outcome is not always straightforward and will require more detailed consideration of the various potential measurement outcomes.

Subsequent Recognition and Derecognition
Upon adoption, FIN 48 specifies that an enterprise shall recognize the benefit of the tax position in the first interim period that meets any one three criteria as follow:

  1. The more-likely-than-not recognition threshold is met by the reporting date.
  2. The tax matter is ultimately settled through negotiation or litigation.
  3. The statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.


Consequently, recognition can occur at any point prior to or after the tax position is reported to the taxing authority. Derecognition of a previously recognized tax position should be in the first interim period that the tax position no longer meets the more-likely-than-not threshold. Basically, it is treated similar to a change in estimate.

Subsequent recognition and derecognition should be based on the best information available as of the balance sheet date. FIN 48 does not allow changes based on information that was obtained after the balance sheet but before the report date, but could still require disclosures if the subsequent event is significant.

Interest and Penalties
FIN 48 requires interest to be recognized in the first period that the relevant tax law would require such accrual and should continue until ultimate settlement. If the tax position does not meet the statutory threshold to avoid payment of penalties, an enterprise shall recognize an expense for the penalty amount in the period the entity claims or expects to claim the position within its tax return and is increased if the liability accrued under the tax law similar to interest. Classification within the statement of financial position and the statement of operations is at the option of the enterprise and can either be combined with other income tax amounts or classified separately.

Classification & Disclosure
FIN 48 requires that a liability created shall be classified as current, to the extent that it is expected to be paid within a year and otherwise should be considered long-term. Only liabilities where expected settlement is in cash within one year are to be classified as current, so liabilities where a statute would expire within one year and where no cash payments are made should be classified as long-term in the financials.

The disclosure requirements are as follow:

  • Tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of the period presented, including at a minimum, changes in unrecognized tax benefits as a result of tax positions taken during the current or a prior year, changes resulting from settlements, and reductions due to a lapse of a statute of limitations.
  • The amount of unrecognized benefits that, if recognized, would affect the effective tax rate.
  • The total interest and penalties recognized in operations and in the statement of financial position.
  • For tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months the nature of the uncertainty, the nature of the event that could occur in the next twelve months that would cause the change, an estimate of the range of the reasonably possible change or a statement that an estimate of the range can not be made.
  • A description of tax years that remain open and subject to examination by major tax jurisdictions.

Effective Date 

This interpretation is effective for fiscal years beginning after December 15, 2006. Early adoption is permitted as of the beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial statements, including interim financial statements for that year.

An enterprise shall disclose the cumulative effect of the change on retained earnings in the statement of financial position as of the date of adoption. This is only required in the year of adoption and not in subsequent years.


For private companies you should consult with your accounting firm and legal counsel in adopting this new complex standard.

Have Questions or Comments?

If you have any questions about this media item, we'd like to hear your opinion. Please share your thoughts with us.

Contact EisnerAmper

* Required