What are the two steps used for reporting uncertain tax positions?
An overview of the accounting for uncertain tax positions, including the two-step (recognition and measurement) more-likely-than-not process.
Uncertain tax positions are recognized and measured using a two-step process: (1) determine whether a benefit may be recognized and (2) measure the amount of the benefit.
After determining that an uncertain tax position meets the recognition standard, meaning it has a more-likely-than-not chance of being sustained by the taxing authority, an entity needs to measure the amount of the benefit to be booked. This happens during the second step: the measurement step.
This Portfolio describes FASB's two-step process for determining tax benefits that can be reported on the financial statements: (1) recognition—determine if the tax position meets the threshold test of “more likely than not” (MLTN) that the company will be able to sustain the tax return position, based solely on the ...
Understanding Uncertain Tax Positions
Under ASC 740-10, companies must assess the likelihood that a tax position will be sustained upon examination by the relevant tax authority, and record a liability for the unrecognized tax benefit if it is more likely than not that the tax position will not be sustained.
At the end of each annual reporting period, a corporate entity must make disclosures in the notes of its financial statements that assist with evaluating the entity's uncertain tax positions. Public entities are required to make additional incremental disclosures.
ASC 740 defines an uncertain tax position as the "recognition of tax balances on financial statements that are not recorded on corporate tax returns, if those returns include uncertain tax positions." Some examples of "tax positions" include determining whether a meal expense is 50 percent or 100 percent deductible or ...
48, “Accounting for Uncertainty in Income Taxes” (FIN 48) requires companies to recognize, measure, present and disclose uncertain tax positions they take, or expect to take, in their tax returns.
Current and deferred taxes are measured based on tax rates that are enacted or substantively enacted at the reporting date. An exception to recognition of deferred taxes exists related to intra-entity transfers of inventory that result in a step-up in tax basis.
The two main accounting methods are cash accounting and accrual accounting. Cash accounting records revenues and expenses when they are received and paid. Accrual accounting records revenues and expenses when they occur. Generally accepted accounting principles (GAAP) requires accrual accounting.
What is the meaning of uncertain in accounting?
In accounting, uncertainty refers to the inability to foretell consequences or outcomes because there is a lack of knowledge or bases on which to make any predictions.
Uncertain Tax Position Reporting
Corporations filing Forms 1120, 1120-F, 1120-L, or 1120-PC must file Schedule UTP if total assets equal or exceed $10 million for the tax year and the corporation recorded a liability for unrecognized tax benefits for a tax position in audited financial statements.
48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”) and later with Accounting Standards Codification (ASC) 740, FASB has dictated the minimum recognition threshold to be achieved before a tax position will be recognized in the financial statements.
While the chances of an IRS audit have been slim, the agency may scrutinize your return for several reasons. Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits.
When a return position is contrary to regulations, you must file Form 8275-R. File all Forms 8275-R with your original tax return. Keep a copy for your records. You may also be able to file Forms 8275-R with an amended return.
For financial reporting purposes, ASC 740 requires disclosure of the effect of adjustments to deferred tax amounts for enacted changes in tax laws or rates as well as, for interim periods, the effect of the change in the estimated annual effective tax rate.
Which of the following statements about ASC 740 as it relates to uncertain tax positions is true? ASC 740 deals with recognized tax benefits related to income tax positions regardless of whether the item is taken on a filed tax return.
ASC 740 allows a specific exception to the recognition of a deferred tax liability on the outside basis difference/U.S. tax consequences of repatriating the historic earnings of a foreign corporation or foreign corporate joint venture if the earnings are expected to be permanently reinvested outside of the U.S. To ...
Discrete items generally relate to changes in tax laws, adjustments to prior period's actual liability determined upon filing tax returns, and adjustments to previously recorded reserves for uncertain tax positions, initially recording or fully reversing valuation allowances.
FIN 48 applies to all entities that prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) and governs all material positions those entities take on their income tax returns. FIN 48 is effective for privately held businesses for periods beginning after Dec. 15, 2007.
What are the rules for FIN 48?
Under FIN 48, a tax position is recorded only if the tax position is more likely than not to be sustained on examination (including related appeals or litigation processes). A material tax position is tested under a two-step process consisting of a recognition step and a measurement step.
FIN 48 requires firms to evaluate each tax position using a two-step recognition and measurement process. To meet the recognition threshold, a position must be more-likely-than-not to be sustained in the court of highest order based on its technical merits.
Answer and Explanation: c. Life insurance premiums would never require reporting deferred tax assets or deferred tax liabilities. Premiums for life insurance are a type of personal expense and are not regulated by tax laws.
A deferred tax liability usually occurs when standard company accounting rules differ from the accounting methods used by the government. The depreciation of fixed assets is a common example. Companies typically report depreciation in their financial statements with a straight-line depreciation method.
The largest components of deferred tax assets for sample firms are Loss and Credit Carryforwards and Employment and Post-employment Benefits. The largest components of deferred tax liabilities are Property, Plant & Equipment and Leases.