Question

explain why it is important to disclose material items in the financial statements of a public company and the role that ASC 740-10 (uncertain tax positions) plays within the disclosure process. While ASC 740-10 requires public companies to record reserves in the financial statements for future tax burdens of uncertain tax positions taken on prior years’ returns, clients have other alternatives to choose if they feel the need to correct the positions while not booking a reserve. Provide the clients other options for dealing with an uncertain tax position besides recording a reserve in the financials. Keep in mind the statute of limitations.

Answer 1

Reporting material items in the financial statements is important because it allows investors and creditors to more easily value a company, especially about uncertain tax positions. While the amount reported is just an estimate, it provides information about what possible losses and what types of issues the company is facing. This helps inform investors and creditors in making decisions.
The ASC 740 addresses the financial statement consequences of the following events:
•Revenues, expenses, gains or losses recognized for tax purposes in an earlier or later year than recognized for financial statement purposes
•Other events that create differences between book and tax bases of assets and liabilities
•Operating loss and tax credit carrybacks or carryforwards

The ASC 740 has two objectives which are to account for current taxes payable and refundable and to account for deferred tax liabilities and assets.It also deals with accounting for temporary differences and uncertain tax positions.Regarding uncertain tax positions, the standard addresses the following basic situation: For tax purposes, a firm may take a position in claiming a tax benefit that might not be sustained under IRS scrutiny.The FASB, however, believes that for determining the financial statement tax provision, such uncertain tax positions either should not be recognized or should be recognized only partially. In order to apply the standard, the position must be more than 50% likely to occur and then must determine the amount of benefit recognizable.

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