dtt_fin 48_are your risks under control_nov2008

8/9/2019 DTT_FIN 48_Are Your Risks Under Control_nov2008

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FIN 48:Are Your Risks Under Control?

Vickie Carr, Deloitte Tax LLPJay Goul, Deloitte & Touche LLP

November 20, 2008

The Risk Intelligence series presents:


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Copyright 2008 Deloitte Development LLC. All rights reserved.

Agenda

Seigel Tax Reserve Report SEC Comments Material Weaknesses and Remediation Efforts

Control Risks Disclosures Whos Reading Them Current / Future Developments


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Polling Question # 1

When evaluating risk, do you view FIN 48 as a:

High risk

Medium risk Low risk Not applicable because have not yet implemented

FIN 48 Dont Know


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Siegel Tax Reserve Report

The Seigel Tax Reserve Report To provide, on a quarterly basis, information presented in

financial statements submitted by public companies withemphasis on analysis and evaluation of compliance with

FIN 48s disclosure mandates and quantitative datadealing with tax reserves Quarterly report (most recent issued July 2008) covers

SEC filings of public companies for annual periods ended

in 2007 and through March 31, 2008 Analysis performed on all public companies with annualrevenues of at least $2 billion (670 companies)

Source: Seigel & Associates, LLC


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Siegel Tax Reserve Report (cont.)


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SEC Comment Letters - Overview

Performed an EDGAR search on FIN 48 matterswithin comment letters issued December 15, 2006 November 13, 2008

A total of 41 companies received letters Letters were classified as: pre-adoption (filings prior to

implementation date), adoption (first filing followingadoption) and post-adoption (subsequent filings)

A total of 62 comments were issued Individual comments were grouped by relevant FIN 48

paragraph


7/36Copyright 2008 Deloitte Development LLC. All rights reserved.

SEC Comment LettersThe following displays the distribution of the 41 companies receiving letters by

industry:

22%

17%

14%10%

15%

22% TechnologyConsumer Business

Manufacturing

Real Estate

Financial Services

Other


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Polling Question #2

Since the issuance of FIN 48, which of the belowcaused your company the most difficulty whenfinalizing financial statement disclosures?

Expected changes in FIN 48 over the next 12

months Interest and penalties Presentation of the tabular roll-forward

Amounts which, if recognized, would impact theeffective tax rate (ETR) None of the above Dont Know/ Not applicable



Change in Judgment (paragraph 13-14)

Please explain to us the facts and circumstances that occurred between the date you initially adopted FIN 48 and the date you determined the error that resulted in a negative adjustment of $xx million to equity.

Please clearly indicate how you determined the amount of the adjustment when you initially adopted FIN 48 and how you determined the amount of the error.Please help us understand how and why you

determined that the error relates to the initial adoption of FIN 48.



Paragraph 21(c) Interest and Penalties

Tell us what consideration you have given todisclosing the total amounts of interest and penalties recognized in the statement of operations pursuant to paragraph 21c of FIN 48.



Paragraph 21(d) Early Warning

Please revise your disclosure to address whether it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.Identify the nature of any uncertainties, the nature of the events that could occur within the next 12 months that could cause the amounts to change, and provide an estimate of the range of the reasonably possible change or state that an estimate of the range cannot be made.We note the Company expects the amount of unrecognized tax benefits may change in the next twelve months; however,quantification of such change cannot be estimated.Please revise to indicate the nature of the uncertainty and the nature of the each event that could occur in the next 12 months that would cause the change for each significant tax position.



Cumulative Effect of the Change

You disclose that you did not recognize any assets or liabilities for unrecognized tax benefits upon your adoption of FIN 48 on January 1, 2007.However, you indicate that your total amount of unrecognized tax benefits as of the date of adoption was $2.6 million.It is unclear whether you have an unrecognized tax

benefit liability that you have not recorded or whether your adoption of FIN 48 resulted in no additional asset or liability being recorded.



Contractual Obligations Table

Tell us what consideration you gave to updating your table of contractual obligations for amounts related to FIN 48 liabilities. Refer to the SEC Regulations Committee Meeting minutes on April 17, 2007.

We note that your non- current tax payable obligation is excluded from your contractual obligation table.Please tell us why excluding this obligation is appropriate. Refer to the guidance in FIN 48 and Release No. 33-8182 Disclosures in ManagementsDiscussion any Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.



Disclosure Examples

Contractual Obligations by Year

Total

Lessthan 1year

1-3years

3-5years

Morethan 5years

(in millions)

Long-term debt obligations $ XXX $ XXX $ XXX $ XXX $ XXX

Interest payments on long-term debt XXX XXX XXX XXX XXX

Operating lease obligations XXX XXX XXX XXX XXX

Capital lease obligations XXX XXX XXX XXX XXX

Purchase obligations XXX XXX XXX XXX XXX

Interpretation 48 obligations, includinginterest and penalties XXX XXX XXX XXX XXX

Other liabilities reflected onConsolidated Balance Sheet XXX XXX XXX XXX XXX

Total $ XXX $ XXX $ XXX $ XXX $ XXX




Did you participate in discussions about includingFIN 48 liabilities in the contractual obligations table?

Yes No Dont Know/ Not applicable



Material Weaknesses

Source: Compliance Week survey of S&P 500 Material Weaknesses for 2007



Specific Causes of Tax Material Weaknesses

29%

19%

9%3%

8%

8%

9%

5%4%

3% 3% Acct for Income Taxes / TaxProvisionDeferred Taxes

Other

Improper Treatment of Tax Liabilities / AssetsValuation Allowance / NOLs

Acquisitions / Dispositions

Foreign Taxes

FIN 48

State Taxes

Transaction Taxes

Continuing / DiscontinuedOperations

`



Internal Control Issues Underlying Material Weaknesses

0% 10% 20% 30% 40% 50%

Lack of Review

Personnel

Inadeq. Reconciliation

General Process

Non-routine Trans

Lack of Documentation

Period End Process

Other



Remediation Efforts0% 20% 40% 60% 80%

Staffing

Engage Experts

Improve Review Process

Improve Tax Accounting

Training

Technology

Improve Reconciliation

Controls

Increase Expert Involvement

Improve Documentation

Improve Communication

Other


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Which of the following do you believe provides thehighest degree of risk for your organization?

Lack of sufficient review

Lack of resources or lack of resources with theappropriate income tax accounting experience Inadequate reconciliations supporting financial

statement amounts and disclosures Lack of appropriate documentation Issues associated with foreign income taxes Dont Know / Not applicable


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Control Risks

Has your organization identified appropriate andefficient key controls to monitor uncertain taxpositions?

Do the personnel performing the key controls havethe appropriate knowledge of GAAP related to FIN48 to perform the control activities effectively?

Do the personnel internally testing the key controls

have the appropriate expertise? Have judgments and estimates for similar items

been applied consistently?


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Control Risks (cont.)

Does your organization maintain appropriate booksand records to support the ending deferred taxbalances?

Have you evaluated any systematic controls thatare used in accounting for uncertain tax positions?


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Control Risks Leading Practices

Holistic approach Frequent and timely communication between tax

departments and finance/accounting departments Appropriate consideration of uncertain tax positions

in international locations Involve external auditor in assessing more-likely-

than- not (MLTN) considerations before the closingof transactions with significant tax implications

Evaluate the capabilities and/or effectiveness of theinternal audit department as it related to auditingincome tax controls


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With respect to implementing FIN 48, what was thebiggest surprise with implementation?

State tax issues Strain on resources Documentation expectations Effectively settled Disclosures Dont Know/ Not Applicable


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FIN 48 Disclosures Is it a Roadmap?

Government officials again downplayed theimportance of tax accrual workpapers and FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," in conducting taxpayer exams

during a November 7 discussion. Lack of disaggregation of data by jurisdiction Explanations provided for changes in the liability are

typically vague or ambiguous

Source: May 10, 2007: IRS issues Memorandum for Executives, Managers, and Examiners LMSB Division , to discuss how IRS will use FIN 48 footnote data in itsexaminations


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IRS Work Product Doctrine

IRS: Work product doctrine precedence United States v. Textron Inc. (2007) United States v. Arthur Young & Co. (1984) Workpapers could still be requested, however,

there is a "tight review process" before the decisionis made to seek relevant workpapers. "It's not justthe agent," but rather the agent's manager andother higher-up officials involved in that

determination an IRS representative reported


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Permanent Subcommittee

Senate's Permanent Subcommittee onInvestigations led by Michigan DemocratSenator Carl Levin Investigators solicited details about corporate tax positions

from at least 30 companies in August 2007 Unclear the results of this investigation or if further

requests will be made


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Need forValuationAllowances

SFAS 141R APB 23

PermanentlyReinvested

Other Risks Considerations

InternationalEconomies

Section 382LimitationsState Taxes

LegislativeLandscape

In todayseconomic

environment . . .


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Questions & Answers


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Join us December 18 th at2 PM EST as our Risk Intelligence

series presents:

Washington Update:

Assessing Risks Associatedwith Future FinancialRegulation


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Thank you for joiningtodays webcast.

To request CPE credit,

click the link below.


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Contact information

Vickie Carr [email protected] Tax LLP

Jay Goul [email protected] & Touche LLP


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This presentation contains general information only and is based on theexperiences and research of Deloitte practitioners. Deloitte is not, by means of thispresentation, rendering business, financial, investment, or other professionaladvice or services. This presentation is not a substitute for such professionaladvice or services, nor should it be used as a basis for any decision or action thatmay affect your business. Before making any decision or taking any action that

may affect your business, you should consult a qualified professional advisor.Deloitte, its affiliates, and related entities shall not be responsible for any losssustained by any person who relies on this presentation.


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