Question

Examine the impact of FIN 48 (Accounting for the Uncertainty in Income Taxes) on GAAP reporting. Identify the benefits of the requirements on financial reporting. Assess whether FIN 48 was necessary and support your position.

Answer 1

I HOPE YOU WILL RATE MY ANSWER POSITIVELY,

Under IFRS Deferred taxes are not recognized for the following items: the initial recognition of goodwill, the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction neither accounting profit nor taxable profit (tax loss) is affected Unlike IFRS, GAAP Deferred taxes are not recognized for the following items: Goodwill for which amortization is not deductible for tax purposes and Unlike IFRS, U.S. GAAP does not have a similar exception.

Under IFRS Income tax related to distributions to holders of an equity instrument and to transaction costs of equity, transaction is accounted for in accordance with IAS 12, while under GAAP Income tax related to nonmonetary transactions, including nonreciprocal transfers with owners is accounted for in accordance with ASC 740-10.

Under IFRS Deferred taxes on the elimination of intragroup profits are calculated with reference to the tax rate of the buyer at the end of the reporting period. Taxes paid by the seller are recorded as a current tax expense, Unlike IFRS; deferred taxes in GAAP are not recognized on the elimination of intercompany profits. Taxes paid by the seller on intercompany profits are recorded as an asset and recognized on the sale to a third party.

I would say the GAAP reporting standard best reflect financial reporting for taxes because under IFRS specific guidance pertaining to uncertainty tax position is not provided whiles under GAAP two steps process is applied which is a benefit will recognize it is more likely that a position will be upheld based on its technical merit. The amount measured should be greater than 50%

Under FIN 48, one occasion when the remaining benefits of uncertain tax positions can be fully and finally recognized in US GAAP financial statements is when an enterprise determines that effective settlement of the uncertain position occurs. FIN 48 states: An enterprise shall evaluate all of the following conditions when determining whether an effective settlement has occurred

It is definite that the taxing authority would examine or reexamine any aspect of the tax position. In making this assessment management shall consider the taxing authority’s policy on reopening closed examinations and the specific facts and circumstances of the tax position. Management shall presume the relevant taxing authority has full knowledge of all relevant information in making the assessment on whether the taxing authority would reopen a previously closed examination. This means that when an IRS examination is closed there has been an effective settlement of all uncertain tax positions for the examined year, whether such uncertainties are known to the IRS and examined or not, so long as the conditions in the immediately preceding quote are present.

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