Private lessons: public company experiences with FIN 48 provide map for private companies.

Once it is determined that an uncertain position meets the recognition criteria, it must be further evaluated to discern the measurement of the amount of the benefit that can be recorded. This is a very subjective aspect of FIN 48.

Some positions will be all or nothing, which means if the position meets the more likely than not threshold, then 100 percent of the benefit from the position will be realized. Examples include whether an item is taxable, whether an item is capital or ordinary, whether a reorganization is tax-free, whether nexus has been established in a state or whether a permanent establishment is created in a foreign jurisdiction.

A greater majority of tax positions that meet the more likely than not standard will require measurement of the certainty to determine the benefit to be recognized. The quality of the documentation supporting a tax position can have a significant impact on its outcome and thus must be considered in the measurement process.

ONGOING MONITORING OF TAX POSITIONS

Amounts reserved under FIN 48 for unrecognized tax benefits should not be changed unless new information comes to light in a subsequent reporting period. A change in the interpretation of the tax law, for example, is considered new information and thus will have to be monitored to determine its impact on the amount of any unrecognized tax benefits.

This requirement to monitor changes in tax law and their impact on existing (and new) tax positions will be especially challenging for private companies, as they tend to have fewer qualified in-house tax personnel. These companies may need to rely more heavily on outside tax consultants to monitor technical developments.

DISCLOSURES

Various disclosures in financial statement footnotes are required in connection with the adoption and ongoing FIN 48 compliance. The two disclosures most likely to be troublesome to private companies are the "tabular reconciliation" and the "12-month" disclosures.

The tabular reconciliation is an annual reconciliation of all activity in unrecognized tax benefits by category. The categories include reserves added in the current year, prior year reserves adjusted, payments to taxing authorities and reserves reversed due to lapsing of the underlying statute of limitations.

For larger companies, the disclosure of amounts by category will not be problematic, as they will likely have a large number of unrecognized tax benefits in each category and are generally subject to many taxing jurisdictions. For private companies, which do not have as many unrecognized tax benefits and may be subject to only a few taxing jurisdictions, the required disclosures could reveal more information to the tax authority than they would like.

The "12-month" disclosure is required when a significant adjustment to the unrecognized tax benefit is expected within 12 months of the report date (year end).

For example, if 50 percent of a company's unrecognized tax benefit relates to a federal position in its 2004 calendar return, that position will expire upon the lapsing of the statute of limitations for the 2004 tax year (generally, Sept. 15, 2008, assuming the return was extended).

That means that a disclosure would likely be required in the 2007 annual report indicating that 50 percent of the company's unrecognized tax benefit is likely to change within 12 months due to the lapsing of the underlying statute of limitations along with a description of the nature of the underlying issue. These disclosures will no doubt be of interest to the taxing authorities.

THE MUSIC HAS STARTED

The adoption of FIN 48 by a private company will require companies to learn a few more moves and take a fresh look at its tax positions. Documenting and monitoring these positions and identifying new positions in the future will take effort, but the process will prepare the company for any potential tax audit and can enlighten management as to the importance of managing tax risk.

Joseph S. DeTrane, CPA is a partner in Grant Thornton's Greater Bay Area tax practice. You can reach him at Joe.DeTrane@gt.com.

BY JOSEPH S. DeTRANE, CPA