Wiley GAAP 2008

Perspective and Issues

Reporting entities are required to file income tax returns and pay income taxes in the domestic (federal, state, and local) and foreign jurisdictions in which they do business. GAAP requires that financial statements be prepared on an accrual basis and that, consequently, the reporting entity is required to accrue a liability for income taxes owed or expected to be owed with respect to income tax returns filed or to be filed for all applicable tax years and in all applicable jurisdictions. A longstanding debate has involved the controversial recognition of benefits (or reduced obligations) related to income tax positions that are uncertain or aggressive and which, if challenged, have a more‐than‐slight likelihood of not being sustained, resulting in the need to pay additional income taxes, often with interest and—sometimes—penalties added. Preparers have objected to presenting income tax obligations for such positions, often on the not‐unreasonable theory that to do so would provide taxing authorities with a ”road map” to the challengeable income tax positions taken by the reporting entity. With the June 2006 issuance of FIN 48, Accounting for Uncertainty in Income Taxes, uncertain income tax positions are now subject to formal recognition and measurement criteria under GAAP. This standard is addressed in detail in this chapter.

The computation of taxable income for the purpose of filing federal, state, and local income tax returns differs from the computation ...