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Welcome back.
In this module, we'll continue our discussion about income taxes, but
instead of talking about deferred taxes we're going to be talking about
uncertain tax positions, another very important topic.
So let's start out with an introduction to uncertain tax positions.
So not all tax deductions survive.
There's different approaches to taking deductions on a tax return.
Some positions are very conservative.
Salary paid to employees are usually deductible and some are disputable.
How you account for transfer of payments, how you allocate taxes between
tax jurisdictions, maybe subject to different interpretations.
And some can be done right at aggressive and
R & D costs that are frequently cited for this.
So what is the accounting issue, where the premise when do you recognize, so
we want to see accounting issue, where the premise.
When do you recognize a deduction?
Do you recognize it when it's taken?
Or when it's accepted by the tax authority?
And how do you incorporate that uncertainty about whether or
be accepted by the tax authority into the measurement of the deduction?
So there's different ways to look at it.
One way to look at it could be that uncertain taxes are a contingent asset.
And then you would look at this is a gain contingency and you wouldn't include
the impact of that deduction in income until the uncertainty is resolved.
In other words when it's accepted by the tax authority.
So graphically you could look at it like this.
For the most part you're not going to accept it until
the probability of recognition becomes very high.
This is what the FASB would call a benefit approach.
You're going to wait until the probability is high and
recognize the benefit, otherwise there is no recognition.
Or you could look at uncertain taxes as a contingent liability.
You could say uncertain tax positions could be viewed as a contingent loss if
it's not accepted by the tax authority.
And at that you would record it when it
becomes probable that a liability exists to that taxing authority.
Well, let's look at that bar again.
Now we've just reversed the probabilities on it.
There would be no recognition if it's probable of denial.
But if it's not probable of denial, we're going to recognize and
the benefit of the tax deduction when it's taken.
So this would be an impairment approach,
this is the terminology the Feds would use.
So which is correct?
Either the tax deduction assets or liabilities.
If you consider it a contingent asset,
you would only recognize it if it's reasonably assured it will not be denied.
If it's considered a liability,
which the FASB compares to an impairment, then the benefit would be
recognized unless it was probable that the deduction would be denied.
So which would it be?
Note that different interpretations are both based on an amortized cost model.
So no tax benefit is recognized until the benefit is reasonably certain,
or no tax liability recognized unless the denial of a benefit is probable.
Both of those have a recognition threshold,
which is characteristic of an amortized cost model.
That's not the way you would do it under fair value.
Under a fair value model you do not have a recognition threshold,
you would deal with uncertainty through measurement.
So there's a difference.
These are a recognition threshold that's characteristic of an amortized cost model.
