FASB Increases Relevance & Comparability of Income Tax in Financial Reporting

The Financial Accounting Standards Board (FASB) on Thursday issued an interpretation that increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes.

“T[his] interpretation reflects our concerns that widespread diversity in practice, including inconsistent measurement associated with uncertainty in accounting for income taxes, has resulted in less relevant, less comparable and less complete information for investors and other users of financial statements,” Edward W. Trott, FASB Member, said in a prepared statement announcing the final interpretation. “Consequently, we are addressing these concerns by requiring all tax positions be evaluated using consistent criteria and measurement and further supplemented by enhanced disclosure.”

Accordingly, the newly released interpretation of FASB Statement No. 109, Accounting for Income Taxes prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The Interpretation also requires expanded disclosure with respect to the uncertainty in income taxes. Currently, the accounting for uncertainty in income taxes, which is based upon the validity of a tax position, is subject to significant and varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements.

This Interpretation, which incorporates input received from FASB constituents, as well as views expressed during a public roundtable, is effective for fiscal years beginning after December 15, 2006.

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