The Risk Intelligence series presents:

FIN 48:
Are Your Risks Under Control?

Vickie Carr, Deloitte Tax LLP

Jay Goul, Deloitte & Touche LLP

November 20, 2008

 Agenda

• Seigel Tax Reserve Report

• SEC Comments
• Material Weaknesses and Remediation Efforts
• Control Risks
• Disclosures – Who’s Reading Them
• Current / Future Developments

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 Polling Question # 1

When evaluating risk, do you view FIN 48 as a:

• High risk
• Medium risk
• Low risk
• Not applicable because have not yet implemented
FIN 48
• Don’t Know

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 Siegel Tax Reserve Report

The Seigel Tax Reserve Report©

–To provide, on a quarterly basis, information presented in
financial statements submitted by public companies with
emphasis on analysis and evaluation of compliance with
FIN 48’s disclosure mandates and quantitative data
dealing with tax reserves
–Quarterly report (most recent issued July 2008) covers
SEC filings of public companies for annual periods ended
in 2007 and through March 31, 2008
–Analysis performed on all public companies with annual
revenues of at least $2 billion (670 companies)

Source: Seigel & Associates, LLC

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 Siegel Tax Reserve Report (cont.)

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 SEC Comment Letters - Overview
• Performed an EDGAR search on FIN 48 matters
within comment letters issued December 15, 2006 –
November 13, 2008
• A total of 41 companies received letters
– Letters were classified as: pre-adoption (filings prior to
implementation date), adoption (first filing following
adoption) and post-adoption (subsequent filings)
• A total of 62 comments were issued
– Individual comments were grouped by relevant FIN 48
paragraph

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 SEC Comment Letters
The following displays the distribution of the 41 companies receiving letters by
industry:

22% Technology
22%
Consumer Business
Manufacturing
Real Estate
15% 17% Financial Services
Other
10%
14%

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 SEC Comment Letters (cont.)
The following displays the distribution of the 62 comments by paragraph reference:

8% 14% Pre-Adoption
10% Par. 20
Par. 21
15%
13% Par. 22
Par. 23-24
Oblig Table
8%
32% Other

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 Polling Question #2
Since the issuance of FIN 48, which of the below
caused your company the most difficulty when
finalizing financial statement disclosures?
• Expected changes in FIN 48 over the next 12
months
• Interest and penalties
• Presentation of the tabular roll-forward
• Amounts which, if recognized, would impact the
effective tax rate (ETR)
• None of the above
• Don’t Know/ Not applicable
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 Change in Judgment (paragraph 13-14)
“Please explain to us the facts and circumstances that
occurred between the date you initially adopted FIN 48
and the date you determined the error that resulted in a
negative adjustment of $xx million to equity.
Please clearly indicate how you determined the amount
of the adjustment when you initially adopted FIN 48 and
how you determined the amount of the error.
Please help us understand how and why you
determined that the error relates to the initial adoption of
FIN 48.”

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 Paragraph 21(c) – Interest and Penalties

“Tell us what consideration you have given to

disclosing the total amounts of interest and
penalties recognized in the statement of operations
… pursuant to paragraph 21c of FIN 48.”

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 Paragraph 21(d) – Early Warning
“Please revise your disclosure to address whether it is reasonably
possible that the total amounts of unrecognized tax benefits will
significantly increase or decrease within 12 months of the reporting
date.
Identify the nature of any uncertainties, the nature of the events that
could occur within the next 12 months that could cause the amounts
to change, and provide an estimate of the range of the reasonably
possible change or state that an estimate of the range cannot be
made.
We note the Company expects the amount of unrecognized tax
benefits may change in the next twelve months; however,
quantification of such change cannot be estimated.
Please revise to indicate the nature of the uncertainty and the nature
of the each event that could occur in the next 12 months that would
cause the change for each significant tax position.”

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 Cumulative Effect of the Change

You disclose … that you did not recognize any

assets or liabilities for unrecognized tax benefits
upon your adoption of FIN 48 on January 1, 2007.
However, you indicate that your total amount of
unrecognized tax benefits as of the date of adoption
was $2.6 million.
It is unclear whether you have an unrecognized tax
benefit liability that you have not recorded or
whether your adoption of FIN 48 resulted in no
additional asset or liability being recorded.

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 Contractual Obligations Table

• Tell us what consideration you gave to updating your

table of contractual obligations for amounts related to
FIN 48 liabilities. Refer to the SEC Regulations
Committee Meeting minutes on April 17, 2007.
• We note that your non-current tax payable obligation …
is excluded from your contractual obligation table.
Please tell us why excluding this obligation is
appropriate. Refer to the guidance in FIN 48 and
Release No. 33-8182 – Disclosures in Management’s
Discussion any Analysis about Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations.

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 Disclosure Examples
Contractual Obligations by Year

Less More
than 1 1-3 3-5 than 5
Total year years years years
(in millions)
Long-term debt obligations $ XXX $ XXX $ XXX $ XXX $ XXX
Interest payments on long-term debt XXX XXX XXX XXX XXX
Operating lease obligations XXX XXX XXX XXX XXX
Capital lease obligations XXX XXX XXX XXX XXX
Purchase obligations XXX XXX XXX XXX XXX

Interpretation 48 obligations, including

interest and penalties XXX XXX XXX XXX XXX

Other liabilities reflected on

Consolidated Balance Sheet XXX XXX XXX XXX XXX
Total $ XXX $ XXX $ XXX $ XXX $ XXX

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 Polling Question # 3

Did you participate in discussions about including

FIN 48 liabilities in the contractual obligations table?

• Yes
• No
• Don’t Know/ Not applicable

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 Material Weaknesses

Source: Compliance Week survey of S&P 500 Material Weaknesses for 2007
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 Specific Causes of Tax Material Weaknesses

3% 3% Acct for Income Taxes / Tax

Provision
Deferred Taxes
4% Other
5%
29% Improper Treatment of Tax Liabilities
/ Assets
9% Valuation Allowance / NOLs

Acquisitions / Dispositions

8% `
Foreign Taxes

FIN 48

8% State Taxes
19% Transaction Taxes

3% 9% Continuing / Discontinued
Operations
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 Internal Control Issues Underlying Material Weaknesses

0% 10% 20% 30% 40% 50%

Lack of Review

Personnel

Inadeq. Reconciliation

General Process

Non-routine Trans

Lack of Documentation

Period End Process

Other

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 Remediation Efforts
0% 20% 40% 60% 80%

Staffing

Engage Experts

Improve Review Process

Improve Tax Accounting…

Training

Technology

Improve Reconciliation…

Controls

Increase Expert Involvement

Improve Documentation

Improve Communication

Other
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 Polling Question # 4

Which of the following do you believe provides the

highest degree of risk for your organization?
• Lack of sufficient review
• Lack of resources or lack of resources with the
appropriate income tax accounting experience
• Inadequate reconciliations supporting financial
statement amounts and disclosures
• Lack of appropriate documentation
• Issues associated with foreign income taxes
• Don’t Know / Not applicable
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 Control Risks

• Has your organization identified appropriate and

efficient key controls to monitor uncertain tax
positions?
• Do the personnel performing the key controls have
the appropriate knowledge of GAAP related to FIN
48 to perform the control activities effectively?
• Do the personnel internally testing the key controls
have the appropriate expertise?
• Have judgments and estimates for similar items
been applied consistently?

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 Control Risks (cont.)

• Does your organization maintain appropriate books

and records to support the ending deferred tax
balances?
• Have you evaluated any systematic controls that
are used in accounting for uncertain tax positions?

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 Control Risks – Leading Practices
• Holistic approach
• Frequent and timely communication between tax
departments and finance/accounting departments
• Appropriate consideration of uncertain tax positions
in international locations
• Involve external auditor in assessing more-likely-
than-not (“MLTN”) considerations before the closing
of transactions with significant tax implications
• Evaluate the capabilities and/or effectiveness of the
internal audit department as it related to auditing
income tax controls
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 Polling Question # 5

With respect to implementing FIN 48, what was the

biggest surprise with implementation?

• State tax issues

• Strain on resources
• Documentation expectations
• Effectively settled
• Disclosures
• Don’t Know/ Not Applicable

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 FIN 48 Disclosures – Is it a Roadmap?
• “Government officials again downplayed the
importance of tax accrual workpapers and FASB
Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes," in conducting taxpayer exams
during a November 7 discussion.”
–Lack of disaggregation of data by jurisdiction
–Explanations provided for changes in the liability are
typically vague or ambiguous

Source: “May 10, 2007: IRS issues Memorandum for Executives, Managers, and
Examiners – LMSB Division, to discuss how IRS will use FIN 48 footnote data in its
examinations”

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 IRS Work Product Doctrine
• IRS: Work product doctrine precedence
–United States v. Textron Inc. (2007)
–United States v. Arthur Young & Co. (1984)
–Workpapers could still be requested, however,
there is a "tight review process" before the decision
is made to seek relevant workpapers. "It's not just
the agent," but rather the agent's manager and
other higher-up officials involved in that
determination” an IRS representative reported

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 Permanent Subcommittee

• Senate's Permanent Subcommittee on

Investigations led by Michigan Democrat
Senator Carl Levin
–Investigators solicited details about corporate tax positions
from at least 30 companies in August 2007
–Unclear the results of this investigation or if further
requests will be made

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 Other Risks Considerations
APB 23
Permanently Need for
SFAS 141R Valuation
Reinvested
Allowances

In today’s
economic
environment . . .

International Section 382

State Taxes –
Economies Limitations
Legislative
Landscape
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Questions & Answers
 Join us December 18 that
2 PM EST as our Risk Intelligence
series presents:

Washington Update:
Assessing Risks Associated
with Future Financial
Regulation
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 Contact information

• Vickie Carr vcarr@deloitte.com

Deloitte Tax LLP

• Jay Goul jgoul@deloitte.com

Deloitte & Touche LLP

Copyright © 2008 Deloitte Development LLC. All rights reserved.

 This presentation contains general information only and is based on the
experiences and research of Deloitte practitioners. Deloitte is not, by means of this
presentation, rendering business, financial, investment, or other professional
advice or services. This presentation is not a substitute for such professional
advice or services, nor should it be used as a basis for any decision or action that
may affect your business. Before making any decision or taking any action that
may affect your business, you should consult a qualified professional advisor.
Deloitte, its affiliates, and related entities shall not be responsible for any loss
sustained by any person who relies on this presentation.

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 A member firm of
Deloitte Touche Tohmatsu
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