FIN 48 to have significant impact on technology companies

Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, of FASB Statement No. 109 (FIN 48), will have a significant impact on how technology companies measure, record and disclose tax reserves relating to income tax uncertainties, according to Grant Thornton LLP's inaugural issue of TechDashboard, a newsletter for technology industry executives.

As FIN 48 is effective for fiscal years beginning after Dec. 15, 2006, public companies with a calendar year end have already had a sense of urgency with respect to its adoption. More specifically, the cumulative effect of its adoption must be reflected in retained earnings as of January 1, 2007 and be disclosed in Form 10-Q being filed for the first quarter of 2007. For private companies that do not issue any interim financial statements, the cumulative effect will not be disclosed until the financial statements for calendar year 2007 are issued in early 2008. Despite this time lag in the reporting of the cumulative effect, private companies should take notice of the substantial efforts expended by public companies in determining the cumulative effect as of January 1, 2007. As a result, private companies should have a similar sense of urgency once the financial statements for calendar year 2006 are issued and they can focus on 2007 priorities.

FIN 48 is likely to particularly impact technology companies for several reasons:

• They often have manufacturing activities located at out-of-state locations, which makes it difficult to argue that nexus (the minimum level of business activity that requires a company to file an income tax return in a state or a local jurisdiction) does not exist. Nexus can also be created in states where companies do not have actual physical presence, for example, where companies further their business through the use of agents and/or affiliates. Further, companies that are protected from having nexus with a state because their activities are limited to solicitations of sales of tangible personal property may lose that protection if such companies engage in other activities, such as product installation, warranty work, or any other material activity deemed to exceed the solicitation of sales.
• They often transfer or license intangible property to related companies. If so, transfer pricing compliance, which is often cited as the biggest tax challenge for global organizations, will undergo further scrutiny.
• They often generate substantial research and experimentation tax credits, net operating losses, and deductions for domestic production activities. Income tax uncertainties can often arise in all of these areas.

FIN 48 compliance will be a complex and time-consuming process, but it should result in increased relevance and comparability in financial reporting with respect to income taxes.

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