Presented by Anthony Dodds, CPA, MST Director of SEC/Public Company Audit Services

1. FASB Interpretation No. 48(FIN 48) Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 Presented by Anthony Dodds, CPA, MST Director of SEC/Public Company Audit Services Malin, Bergquist & Company, LLP

2. FIN 48 Overview / The Basics • Issued in June of 2006, this FASB Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. • Effective Date: For fiscal years beginning after December 15, 2006 (public companies only). • On November 7, 2007, the FASB voted to defer the effective date of FIN 48 for all non-public entities to periods beginning after December 15, 2007. The FASB instructed the staff to develop a FASB Staff Position which had a 30-day comment period once released. This action was in response to a letter issued by the Private Company Financial Reporting Committee that recommended that FASB delay the effective date of FIN 48. • On February 1, 2008, FSP FIN 48-2 Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises was issued. This FSP defers the effective date of FIN 48 for nonpublic enterprises to the annual financial statements for fiscal years beginning after December 15, 2007. FSP 48-2 notes that, when effective (for nonpublic entities), FIN 48 should be applied as of the beginning of the enterprise’s fiscal year.

3. FIN 48 Overview / The Basics • This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. • Statement 109 does not prescribe a recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. • The requirements of this Interpretation apply to not-for-profit organizations. This Interpretation also applies to pass-through entities and entities whose tax liability is subject to 100 percent credit for dividends paid (for example, real estate investment trusts and registered investment companies) that are potentially subject to income taxes.

4. Areas of Focus FIN 48 Principles Key Implementation Considerations Process and Control Considerations Implementation Examples (refer to hand-outs)

5. FIN 48 Principles

6. FIN 48 Principles (Cont.)

7. FIN 48 Principles (Cont.)

8. FIN 48 Principles • Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one of the following: a. An increase in a liability for income taxes payable or a reduction of an income tax refund receivable b. A reduction in a deferred tax asset or an increase in a deferred tax liability c. Both (a) and (b). • The appropriate Unit of Account for a tax position is a matter of judgment and requires consideration of: a. The manner in which the enterprise prepares and supports its income tax return, and b. The approach the enterprise anticipates the taxing authority will take during an examination.

9. FIN 48 Principles • The term tax position refers to a position in a previously filed tax return or a position expected to be taken in a future tax return (e.g., a DTA / NOL) that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. • A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of DTA’s. • The term tax position also encompasses, but is not limited to: a. A decision not to file a tax return (e.g., in a state or international jurisdiction) b. An allocation or a shift of income between jurisdictions c. The characterization of income or a decision to exclude reporting taxable income in a tax return d. A decision to classify a transaction, entity, or other position in a tax return as tax exempt.

10. Implementation Considerations • FIN 48 applies to all income tax positions • Distinguish between “highly certain” and “uncertain” tax positions - Highly certain tax positions - Based on clear and unambiguous tax law • Clearly meet MLTN recognition standard and greater than 50% likely that 100% of benefit will be sustained • Level of analysis under FIN 48 may vary based upon the nature of the position

11. Implementation Considerations – Recognition • An enterprise shall initially recognize the financial statement 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. • As defined in the Interpretation, the term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.

12. Implementation Considerations – Recognition • Conclusion regarding financial statement recognition takes into account tax technical merits, facts and circumstances • Assess the accuracy of facts and assumptions • Review the execution of structuring and planning • Consider “widely understood” administrative practices and precedents of the taxing authority • Consider applicability of recognition analysis to temporary differences • Technical merits of deduction itself vs. timing of deduction

13. Implementation Considerations - Measurement • Determination and scheduling of possible outcome amounts and percentage likelihood associated with each amount • Requirement to identify multiple outcomes and assign related individual probabilities may not apply for all tax positions • Basis for conclusions regarding amounts and probabilities could include • Reports issued by tax authorities to settle the issue in prior years • Evidence of tax authority administrative practices and precedents with acceptance of settlement practices • Changes in tax law, regulations, or rulings that might impact the applicability of a prior settlement

14. Implementation Considerations - Change in Judgment • If the recognition threshold is not initially met, FIN 48 lists three conditions which indicate that the tax position should be subsequently recognized, including: • The tax matter is “ultimately settled” through negotiation or litigation • Derecognize a previously recognized tax position in the first period that it is no longer MLTN • Changes in measurement should also be reflected in the period that such change occurs • Record effects of change in judgment in interim financial statements • Estimated annual effective rate vs. discrete event

15. Implementation Considerations - Change in Judgment (cont.) • Subsequent changes in judgment are based upon new evidence: • Evaluate facts, technical merits and other circumstances for on-going applicability • Timely identification and documentation of events that result in change in judgment • Determination of whether changes are caused by new information or by information that might have been “otherwise knowable” in an earlier reporting period

16. Implementation Considerations - Interest and Penalties • Interest accrual is based upon the difference between the amount of tax benefit recognized in the financial statements and the amount recognized in the tax return. • Interest and penalties for unrecognized tax benefits are to be accrued under the applicable statute. • Classification of interest and penalties is an accounting policy election and they may be classified in the financial statements as either income taxes or another expense classification, based on the accounting policy election of the enterprise. Those elections shall be consistently applied.

17. Implementation Considerations - Classification • Classification as current or non-current liability based upon expected timing of payment (settlement) • Tracking of FIN 48 tax basis - Reclassification of deferred income tax liabilities • Deferred tax assets recorded as result of unrecognized tax benefits • Interaction of FIN 48 and deferred tax asset valuation allowance assessment

18. Implementation Considerations – Cumulative Effect Adjustment • FIN 48 did not change current guidance regarding classification of subsequent adjustments to tax positions acquired in a purchase business combination • Consider treatment for interest attributable to pre- and post-business combination date

19. Implementation Considerations - Disclosures • An enterprise shall disclose its policy on classification of interest and penalties • Tabular roll-forward reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, which shall include at a minimum: (1) The gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period (2) The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the current period (3) The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities (4) Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations

20. Implementation Considerations - Disclosures • Consider technology requirements for tracking uncertain tax positions and related deferred assets and liabilities • Reconciliation of disclosures with trial balance • Twelve month look-forward • Process to identify and monitor potential events that could occur within 12 months, e.g., • Change in exam status • Statute of limitations • Legislation • Consider, for public companies, Reg. S-X quarterly disclosure requirements (refer to hand-out)

21. Implementation Considerations - Disclosures • The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate • The total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position • For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date: (1) The nature of the uncertainty (2) The nature of the event that could occur in the next 12 months that would cause the change (3) An estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made • A description of tax years that remain subject to examination by major tax jurisdictions.

22. Process and Control Considerations Completeness • All uncertain tax positions are identified • All relevant factors pertaining to uncertain income tax positions are identified, gathered and considered and their effects are recognized within the appropriate period Existence and Occurrence • Initial or subsequent recognition and measurement occurs in the period in which it becomes MLTN • Derecognition occurs when no longer MLTN • Facts, technical merits and other circumstances are evaluated for continuing applicability

23. Process and Control Considerations (cont.) Valuation and Measurement • Appropriate potential outcome amounts and probability assignments are used in measurement • Third party opinions and other bases for judgments are factual, reliable, and current • Subsequent changes in judgment are based upon new evidence • Judgments are made by those with authority and experience and subject to appropriate levels of internal review Presentation and Disclosure • Footnote and other disclosures are consistent with underlying data and judgments • Liabilities are appropriately classified • Events are identified which are reasonably possible of occurring and which could result in a significant change in unrecognized tax benefits within 12 months

24. FIN 48 ImplementationGetting the Numbers Right and Keeping the Numbers Right Tax Controls, Processes, and Risks Tax Accounting FIN 48“Keeping the Numbers Right” Maintain and Support Tools and Technology Process Control Assertions: • Completeness • Existence • Valuation and Measurement • Presentation and Disclosure FIN 48“Getting the Numbers Right” One-time Cumulative Effect Adjustment Ongoing application of FIN 48 Distinguish between “Highly Certain” and Uncertain Tax Positions Inventory and Evaluation of Uncertain Tax Positions Recognition and Measurement Interest and Penalties Classification Disclosures