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Deflategate, Binkygate & Disclosing Open Tax Years

DeflategateNot many things capture our collective attention like investigations into controversial cases. The NFL’s investigation into underinflated footballs, or the ongoing allegations of corruption in FIFA, to whether or not David Beckham is a shoddy parent for allowing his daughter to continue to use a pacifier at age 4 are just a few examples. The accounting profession has its investigations into controversies too. A recent example is the investigation the Center for Plain English Accounting (CPEA) conducted about the applicability of the disclosure requirement of open tax years associated with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The CPEA issued a report on this investigation in March.

The most controversial part of FASB Interpretation No. 48, for private companies appears to be on the applicability of a seemingly benign, but ambiguous, disclosure requirement to provide a description of tax years open to examination. The original requirement in FIN 48 to disclose open tax years did not note whether or not the requirement to disclose open tax years was limited to those entities with unrecognized tax benefits. Thus, the applicability of the disclosure requirement was ambiguous for entities without unrecognized tax benefits.

Conflicting views about the applicability of the open tax year’s disclosure requirement sprouted in the years following the issuance of FIN 48. The conflicting views precipitated confusion, additional costs, and peer review findings. The CPEA investigated this wrangle by starting with the peer review findings. What we found was astounding. Here is an excerpt from our report:

Since 2012, the AICPA has been electronically tracking “Matters for Further Consideration” (MFCs) in peer reviews. The electronic database, PRISM, has approximately 12,000 MFCs (without identifying information) which cite a FASB ASC topic. The top FASB ASC topic noted in the MFC database was Topic 740, Income Taxes, with approximately 4,200 MFC citations (the next highest had approximately 1,750 MFC citations). The CPEA reviewed these 4,200 citations and found that a substantial portion pertained to the disclosure requirement of tax years open to examination…The February 2014 Peer Review “Reviewer Focus” noted that failure to disclose tax years open to examination was a common matter identified in peer review overall…

Overwhelmingly, the typical response by firms who received a MFC on failure to disclose tax years open to examination was to accept the finding and change internal policies and practices so that tax years open to examination were disclosed in the future.

As the excerpt indicates, a whopping number of peer review findings relate to a failure to disclose tax years open to examination. But the applicability of that disclosure requirement for entities without unrecognized tax benefits is subject to conflicting views. In fact, the CPEA concluded that the Basis for Conclusions for FASB ASU 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, is clear that entities without material unrecognized tax benefits are not required to disclose tax years open to examination.

The CPEA communicated the results of its investigation with appropriate individuals at the FASB and AICPA. This report is just one of many that the CPEA issues each month to our members on key A&A topics and standards. For a limited time, three Center for Plain English Accounting Reports (including Controversy Over the Applicability of the Disclosure Requirement of Open Tax Years: Unintended Consequences and Lessons for All) are available for free to all.

Visit learncpea.org to give the Center for Plain English Accounting a try today.

While football fans will be disputing the Patriots’ underinflated football scandal for years to come, our investigation and report on disclosing open tax years has helped end disputes on this issue and has helped practitioners understand and implement the standard.

 

Robert Durak, Director- Center for Plain English Accounting, American Institute of CPAs.

 Football image courtesy of Shutterstock

 

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