Accounting for Deferred Income Taxes, 2nd Edition

Chapter 4Accounting for Uncertainty in Income Taxes

Learning objectives

• Identify the objectives and scope of accounting for uncertain tax positions (UTPs) as laid out in FASB Accounting Standards Codification^® (ASC) 740, Income Taxes.
• Determine how to distinguish between a UTP liability and a deferred tax asset (DTA) or deferred tax liability (DTL).
• Identify a unit of account for a UTP.
• Recognize the financial and tax auditing consideration for UTPs.

Overview, objective, rationale, and scope of accounting for UTPs

When UTPs have been taken, there are additional considerations in determining deferred taxes. These are as follows:

• Settlements – The current tax return may actually contain settlements of prior years’ returns which have been agreed with the taxing authority.
• Uncertain positions taken but not settled – Certain tax positions taken in prior years’ or current years’ returns are expected to be disallowed upon examination and that temporary differences have been calculated based on the actual filing position.

Under these conditions, the current year’s taxes may be understated or overstated, and the deferred taxes may be understated. Theoretically, the temporary differences used in the deferred tax computation should reflect the tax positions expected to be ultimately sustained on the returns for years through the balance sheet date. In many cases the differences due ...