1. FASB Interpretation No. 48
An Interpretation of FASB Statement No. 109
Royce W. Mitchell

2. Purpose and Objectives
Reasons for issuance
The scope of the interpretation
The Two-Step process
Recognition and the “more-likely-than-not” benchmark
Measurement of benefit to be recognized
Disclosure requirements
Effective date and transition

3. Reasons for Issuance
Statement 109 contains no specific guidance on uncertainty
Significant diversity in practice
“Lowest common denominator” accounting

4. Scope All tax positions accounted for under Statement 109
Applies to past returns filed and future returns to be filed
Federal and state income tax positions
Interim and annual periods

5. Two-Step Process Recognition “More-likely-than-not” standard
Likelihood of more than 50 percent that the tax position will be upheld upon examination
Requires positive assertion by Company
Considers facts, circumstances and information available at reporting date
Presumes examination and consideration of precedents
Each position examined on its on – no offsets
Determination of “unit-of-measure”

6. Two-Step Process Measurement
Largest amount of tax benefit that meets the more-likely-than-not standard
Considers amounts and probabilities of outcomes that could be realized
Measurement done within unit of measure for each tax position

7. Measurement Example
Possible Benefit Outcome
Percentage Probability of Successful Outcome
Cumulative Percentage Probability of Success
$100 (Complete success in settlement or litigation with IRS)
10%
$80 (very favorable compromise)
20%
30%
$60 (fair compromise)
25%
55%
$40 (unfavorable compromise)
85%
$0 (total loss)
15%
100%

8. Other Consideration Tax planning strategies
Subsequent changes in circumstance
MLTN threshold met
Tax matter settled
Statute of limitations passed

9. Changes in Judgment Result of evaluation of new information
Not from new evaluation or new interpretation by management
Discreet item in period change occurs

10. Interest and Penalties
Start accruing interest in first period required by relevant tax law
Penalties accrued if position does not meet minimum statutory requirement

11. Classification
Liability associated with aggressive tax position not deferred tax liability
Classified as current or long-term like any other liability
Accounting policy elections-
Interest classified as interest or income tax
Penalties classified as income tax or another expense classification

12. Disclosures Tabular disclosure
Unrecognized tax benefits that would affect the effective tax rate
Interest and penalties recognized in income statement
Reasonably possible changes in unrecognized benefits in next 12 months
Nature of uncertainty and event in next 12 months
Range of reasonably possible change
Tax years subject to examination by tax year
Policy on classification of interest and penalties

13. Tabular Disclosure Tabular reconciliation for each period presented
Gross amounts of increases/decreases in unrecognized tax benefits as a result of tax positions taken in prior years
Gross amounts of increases/decreases in unrecognized tax benefits as a result of tax positions taken in current year
Decreases in unrecognized tax benefits as a result of settlements with taxing authorities
Decreases in unrecognized tax benefits due to lapse of statute of limitations

14. Disclosures Tabular disclosure
Unrecognized tax benefits that would affect the effective tax rate
Interest and penalties recognized in income statement
Reasonably possible changes in unrecognized benefits in next 12 months
Nature of uncertainty and event in next 12 months
Range of reasonably possible change
Tax years subject to examination by tax year
Policy on classification of interest and penalties

15. Illustrative Disclosure – pp A33
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before The Internal Revenue Service (IRS) commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 in the first quarter of 2007 that is anticipated to be completed by the end of As of December 31, 2007, the IRS has proposed certain significant adjustments to the Company’s transfer pricing and research credits tax positions. Management is currently evaluating those proposed adjustments to determine if it agrees, but if accepted, the Company does not anticipate the adjustments would result in a material change to its financial position. However, the Company anticipates that it is reasonably possible that an additional payment in the range of $80 to $100 million will be made by the end of 2008.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, As a result of the implementation of Interpretation 48, the Company recognized approximately a $200 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Balance at January 1, $370,000
Additions based on tax positions related to the current year ,000
Additions for tax positions of prior years 30,000
Reductions for tax positions of prior years (60,000)
Settlements (40,000)
Balance at December 31, $310,000
======
Included in the balance at December 31, 2007, are $60 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 2007, 2006, and 2005, the Company recognized approximately $10, $11, and $12 million in interest and penalties. The Company had approximately $60 and $50 million for the payment of interest and penalties accrued at December 31, 2007, and 2006, respectively.

16. Effective Date and Transition
Fiscal years beginning after December 15, 2006
Earlier adoption encouraged
Cumulative effect applied to opening retained earnings
Disclosure in balance sheet only in year of adoption

17. Consideration and Near Term Actions Steps
Senior management and the board should consider
Does the Company have adequate internal controls to support the process of identifying and continually evaluating all tax positions?
Does the Company have sufficiently competent personnel to perform control procedures and oversee processes?
Is use of outside professionals adequate to achieve adequate control procedures and overcome lack of internal trained personnel?
What outside professionals to consult? Tax professional with audit firm or not?

18. Consideration and Near Term Actions Steps
Need to begin process of identifying all tax positions
Disclosure considerations for 12/31/06 financial statements
Work needs to be completed, at a minimum, prior to reporting on 1st quarter of 2007 for public companies
Private companies have more time

19. Consequences
Less flexibility for management in determining reserves for tax exposures
Increased disclosure to public of tax exposures
Could trigger detailed questions from analysts
Attention from IRS?
Greater income statement volatility as managements assessments of issues changes
Will it make companies more risk averse?

20. SEC Guidance
No preferability letter for change in classification of interest and penalties
Tabular presentation not required until year-end

21. Review Reasons for issuance The scope of the interpretation
The Two-Step process
Recognition and the “more-likely-than-not” benchmark
Measurement of benefit to be recognized
Disclosure requirements
Effective date and transition

22. Questions