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Tax toolkit: Working with uncertain tax positions · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC.
• 0:06
  SPEAKER_02: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_02: I'm Heather Horn.
• 0:11
  SPEAKER_02: Thanks for tuning in to our Toolkit series where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:24
  SPEAKER_02: Today we're starting a new month.
• 0:26
  SPEAKER_02: For the month of May, it's all about income taxes.
• 0:29
  SPEAKER_02: Tax is one of our most popular topics here at the podcast, and we're jumping straight into it with one of the most complex areas, uncertain tax positions or UTPs.
• 0:41
  SPEAKER_03: For me, it's really about documentation.
• 0:44
  SPEAKER_03: Somebody can challenge your judgment, but they can't challenge that you made a judgment if you have the proper documentation.
• 0:50
  SPEAKER_01: Focus on disclosures.
• 0:52
  SPEAKER_01: I mean, the disclosures are pretty robust here, and I think the more robust the disclosures are, the more investors feel like they're useful disclosures.
• 1:03
  SPEAKER_02: My guests today are Jen Spang, a PWC National Office Partner, and Cassie Bauman, a PWC National Office Managing Director.
• 1:12
  SPEAKER_02: They're going to be our tour guides today as we explore significant judgment areas, robust disclosures, and of course, the ever-importance of documentation.
• 1:23
  SPEAKER_02: There's a lot to cover, so let's get started.
• 1:31
  SPEAKER_02: Jen, Cassie's, thanks so much for joining me for the first episode of our tax toolkit series.
• 1:37
  SPEAKER_02: And we're jumping straight in with one of the areas that I know I've always found the most challenging, and this is around uncertain tax positions.
• 1:44
  SPEAKER_02: Definitely a lot of judgments.
• 1:46
  SPEAKER_02: And I know you guys get a lot of questions in this area.
• 1:50
  SPEAKER_02: But Jen, I thought before we got into some of the judgments and complexities, it would be helpful to just re-level set for the audience what we mean when we say uncertain tax position or UTP.
• 2:01
  SPEAKER_03: That's a great place to start.
• 2:02
  SPEAKER_03: And it's an important place to start just because it underlies everything we'll talk about today.
• 2:08
  SPEAKER_03: It all begins with what is a tax position.
• 2:11
  SPEAKER_03: And so a tax position, whether you consider it complicated or simplistic, is simply a position that a company has taken or expects to take in a tax return that directly or indirectly impacts the amount that's reported in the financial statements.
• 2:28
  SPEAKER_03: So I just want to stress that idea of has taken or will take in from a position perspective.
• 2:36
  SPEAKER_03: They can impact tax positions, can impact the current or deferred income taxes reported on the financial statements or the realization of deferred tax assets.
• 2:47
  SPEAKER_03: And the term tax position, it can be whether you include a piece of taxable income or take a deduction on a tax return.
• 2:55
  SPEAKER_03: It can also be a character question, like whether an item is capital or ordinary.
• 3:01
  SPEAKER_03: So earlier I mentioned realization of a deferred tax asset, whether something is capital or ordinary could impact that realization and could be an uncertain tax position.
• 3:13
  SPEAKER_03: How to allocate items between jurisdictions, and Heather, we've talked a lot about that on transfer pricing on other podcasts.
• 3:20
  SPEAKER_03: And then deciding not to report something or not file a tax return is also a tax position.
• 3:29
  SPEAKER_03: So that can come up when you hear words like Nexus or permanent establishment.
• 3:34
  SPEAKER_03: Essentially, when an entity might be taxable in a particular jurisdiction, but chooses for whatever reason not to file a tax return, that needs to be considered and accounted for under this model as well as a tax position.
• 3:47
  SPEAKER_02: All right.
• 3:47
  SPEAKER_02: And then Jen, perhaps to state the obvious, when we talk about expects to take, we are talking about transactions that have already occurred.
• 3:56
  SPEAKER_02: So for example, I'm doing my year-end financial reporting as of December 31, 21, but I'm not going to file that tax return until say summer of 2022.
• 4:06
  SPEAKER_02: That would be in the category of expects to take.
• 4:10
  SPEAKER_03: That's right.
• 4:10
  SPEAKER_03: Either that, Heather, and the other common one that comes up is an amended return.
• 4:15
  SPEAKER_03: But importantly, uh just as you said, that would be for something that has already occurred or been reported in the financial statements around a return.
• 4:22
  SPEAKER_03: But you might be filing an amended return on that historical return.
• 4:26
  SPEAKER_03: So that would be included in there as well.
• 4:28
  SPEAKER_03: All right.
• 4:29
  SPEAKER_02: Very helpful clarification.
• 4:30
  SPEAKER_02: And then, Jen, one more question on this.
• 4:32
  SPEAKER_02: Does this apply then to all taxes?
• 4:35
  SPEAKER_03: No, that's a really important question.
• 4:37
  SPEAKER_03: So this guidance only applies to taxes within ASC 740.
• 4:43
  SPEAKER_03: So items that are an income tax.
• 4:46
  SPEAKER_03: So you wouldn't be applying this model of recognition and measurement to other non-income-based taxes like property taxes or sales taxes or anything like that.
• 4:56
  SPEAKER_02: So, Jen, just to close the loop then, what model would you apply to those other types of taxes generally?
• 5:03
  SPEAKER_02: Well, so typically you're talking about contingencies.
• 5:05
  SPEAKER_02: So that'd be under 450.
• 5:07
  SPEAKER_02: All right.
• 5:07
  SPEAKER_02: We won't go further into that, but just for completeness, as I said.
• 5:10
  SPEAKER_02: All right.
• 5:11
  SPEAKER_02: So then if I'm a company and now I'm assessing tax positions and I have some, I'll call it grayness in what I'm reporting on a tax return, how would I then think about this in my financial statements?
• 5:23
  SPEAKER_03: So the 740 model for uncertain tax positions is a two-step model.
• 5:29
  SPEAKER_03: There's recognition and then measurement.
• 5:31
  SPEAKER_03: And so recognition always comes first.
• 5:33
  SPEAKER_03: So let's start there.
• 5:35
  SPEAKER_03: Under recognition, a company is going to recognize the effects of a tax position when it's more likely than not to be sustained upon examination by a tax authority.
• 5:45
  SPEAKER_03: So I we need to unpack that a little bit.
• 5:47
  SPEAKER_03: Lots of words there.
• 5:48
  SPEAKER_03: Lots of words there.
• 5:50
  SPEAKER_03: So first of all, more likely than not, as a threshold is defined as greater than 50%.
• 5:55
  SPEAKER_03: So that's important.
• 5:57
  SPEAKER_03: The determination in this recognition step is based solely on the technical merits of the tax position.
• 6:04
  SPEAKER_03: So what that means, technical merits, they can derive from a number of different authoritative sources, although often these sources might have different weightings.
• 6:13
  SPEAKER_03: But it could be the tax code.
• 6:15
  SPEAKER_03: So like in the US, that would be the Internal Revenue Code, but it's also regulations which interpret or tell you how to apply those rules, tax treaties, court cases, technical advice.
• 6:26
  SPEAKER_03: You have in around the world, you have all kinds of different authority sources of authoritative guidance.
• 6:32
  SPEAKER_03: So all of those need to be considered when you're thinking about technical merits.
• 6:38
  SPEAKER_03: It's worth pointing out in this step, Heather, that you do not consider detection risks.
• 6:44
  SPEAKER_03: So when you're thinking about positions for recognition and measurement for that sake, you need to presume that the tax position will be examined by the relevant tax authority, that the tax authorities have all information available to them.
• 6:59
  SPEAKER_03: So the position is fully disclosed to them in whatever way it needs to be.
• 7:04
  SPEAKER_03: And this means you consider this even when a tax authority rarely, if ever, challenges a position.
• 7:12
  SPEAKER_03: So said a different way, you have to look at the law and your facts under that law.
• 7:18
  SPEAKER_02: All right.
• 7:18
  SPEAKER_02: And so then if you don't meet this 50% threshold, I'll just use that, but more likely than not threshold, then you could not recognize anything.
• 7:28
  SPEAKER_02: Even if let's say, oh, I think there's like a 25% chance, then you would not recognize any benefit from that position in the financial statements.
• 7:36
  SPEAKER_03: That's right.
• 7:36
  SPEAKER_03: If you don't hit the recognition, recognition threshold, you stop there.
• 7:40
  SPEAKER_03: So anything, if you're not at that 50% or above, you record zero.
• 7:45
  SPEAKER_02: Just to recap all that, a company may claim a benefit for tax position if it's more likely than not to be sustained by tax authorities upon examination.
• 7:54
  SPEAKER_02: So then how does measurement come into play?
• 7:57
  SPEAKER_03: Yeah, so let me hit your first point first.
• 8:00
  SPEAKER_03: You're correct in that summary.
• 8:02
  SPEAKER_03: And maybe just something to clarify here.
• 8:04
  SPEAKER_03: When we talk about sustained by tax authorities upon examination, in this case, examination is all the way up through the court of last resorts, if that's where the company chooses to take it.
• 8:16
  SPEAKER_03: So that doesn't mean just an audit, it means the appeals process, it means any other levels in the administrative process, and then into court at any levels that the company would take it.
• 8:28
  SPEAKER_03: Importantly here, like if I use the example of the US, the U.S.
• 8:32
  SPEAKER_03: Supreme Court is the court of last resort.
• 8:35
  SPEAKER_03: One common question we get, Heather, is do we have to consider the likelihood of the Supreme Court hearing the case?
• 8:42
  SPEAKER_03: Because the reality is that the Supreme Court doesn't, for example, hear a lot of tax cases.
• 8:48
  SPEAKER_03: And the answer is no, you don't have to consider the likelihood of the Supreme Court hearing it.
• 8:54
  SPEAKER_03: You're actually assessing if it were heard, um, would it be more likely than not under those technical merits?
• 9:00
  SPEAKER_03: So that's just um maybe adding a little bit to your summary.
• 9:03
  SPEAKER_03: But then going to your question and how measurement comes into play.
• 9:07
  SPEAKER_03: So once you get past this first threshold of recognition, you have to measure the amount of benefit using a concept of cumulative probability.
• 9:17
  SPEAKER_03: So at a high level, under that approach, the amount of benefit recorded represents the largest amount of tax benefit that's greater than 50% likely to be realized upon settlement with a taxing authority.
• 9:31
  SPEAKER_02: All right, that's lots of words, and especially for someone listening who has not done this in practice.
• 9:36
  SPEAKER_02: So, Cassie, let me bring you into the conversation and maybe we can go in a little more detail and explain how someone would evaluate cumulative probability under this framework.
• 9:47
  SPEAKER_01: Sure.
• 9:47
  SPEAKER_01: So in situations where there's more than one possible outcome, each potential outcome needs to be assigned a probability to determine the cumulative probability.
• 9:59
  SPEAKER_01: So determining the individual probability of each outcome obviously requires significant judgment.
• 10:08
  SPEAKER_01: Things that come into play here are things like the perceived weight of the tax law in favor of the taxpayer, um, or the extent of precedence of the tax law being applied to this particular position, but there's just a number.
• 10:24
  SPEAKER_01: And I almost think of it like a list for the visual folks out there.
• 10:29
  SPEAKER_01: So I think of it as a company would basically make a list of each possible outcome.
• 10:35
  SPEAKER_01: And when I say outcome, it's like would I sustain 100% of the benefit that I took?
• 10:40
  SPEAKER_01: Would I sustain 50%?
• 10:42
  SPEAKER_01: Would I sustain none of it?
• 10:43
  SPEAKER_01: And so they'd start with the largest possible outcome at the top of their list, and they'd go down and kind of make a list of all the possible outcomes.
• 10:53
  SPEAKER_01: And then they would go and assign the probability, a probability to each of those.
• 11:01
  SPEAKER_01: So then when you're thinking about cumulative probability, you start at the top of that list, and then you kind of go down and you add up the probabilities until you get to at least 50%.
• 11:14
  SPEAKER_01: So at whatever, say that's line three of your list, you've now added up to 50%.
• 11:19
  SPEAKER_01: That outcome on line three is the amount of benefit that you should be recognizing.
• 11:25
  SPEAKER_02: All right.
• 11:25
  SPEAKER_02: So, Cassie, since I know people are listening, um, I love your analogy to the list, but let me ask a couple more clarifying questions.
• 11:33
  SPEAKER_02: So maybe to state the obvious, my probabilities, if I add them all up, do they need to add up to 100%?
• 11:41
  SPEAKER_02: Yes, they do.
• 11:42
  SPEAKER_02: All right, so I'm allocating the 100% among all these different probabilities.
• 11:46
  SPEAKER_02: And then when you say you kind of go down to get to cumulative of 50%.
• 11:51
  SPEAKER_02: So I'm gonna maybe do, let's try to do an example.
• 11:55
  SPEAKER_02: We'll see if this is gonna work.
• 11:56
  SPEAKER_02: So let's say we have something with um three, let's just do three.
• 12:00
  SPEAKER_02: That'll be the easiest probabilities, and they're each 33%.
• 12:04
  SPEAKER_02: So I think it's going to be 100% sustained, 33%, 50% sustained is 30%, and then not sustained at all would be my other 33%.
• 12:17
  SPEAKER_02: I don't understand my math.
• 12:18
  SPEAKER_02: What am I adding?
• 12:20
  SPEAKER_01: You're adding up the the percentage probabilities, the 33%.
• 12:25
  SPEAKER_01: So you you look at the first one and you say, okay, uh the the chance of me sustaining the full benefit is only 33%.
• 12:31
  SPEAKER_01: So I'm not at 50.
• 12:33
  SPEAKER_01: So that's not my measurement number.
• 12:34
  SPEAKER_01: I go to the next one.
• 12:36
  SPEAKER_01: Now by line two, I'm at 66% total.
• 12:39
  SPEAKER_01: Um, now I'm over 50%.
• 12:41
  SPEAKER_01: So then I say, okay, that's my line.
• 12:43
  SPEAKER_01: What what outcome is on that line?
• 12:45
  SPEAKER_01: It's if it's 50% sustained, then I would recognize 50% of the benefit that I took on that.
• 12:52
  SPEAKER_02: Oh, so I'm not adding these lines.
• 12:54
  SPEAKER_02: I'm just picking one line.
• 12:55
  SPEAKER_02: Okay, I'm glad we did that example.
• 12:57
  SPEAKER_02: Hopefully that also helped uh from a listener perspective.
• 13:00
  SPEAKER_02: So you make your table and then it's almost like you're just pointing to the correct line.
• 13:05
  SPEAKER_02: So I like thinking of your list, then that's very helpful.
• 13:08
  SPEAKER_02: Cassie, then another question.
• 13:10
  SPEAKER_02: Do you always have to do this?
• 13:12
  SPEAKER_02: So for every cumulative tax position, do I create one of these little lists and kind of pick my pick my best line?
• 13:20
  SPEAKER_01: Not always.
• 13:20
  SPEAKER_01: So sometimes it can be a little simpler than that.
• 13:23
  SPEAKER_01: Um, there's a nuance that comes up fairly frequently, and that's when uh a tax position is considered binary, meaning there's only two possible outcomes.
• 13:34
  SPEAKER_01: Um, you're either going to kind of win and the position will be sustained and you'll get the entire benefit, or you will lose and you will get none of the benefit.
• 13:45
  SPEAKER_01: And in that case, the measurement aspect is essentially all or nothing.
• 13:51
  SPEAKER_01: Um, and so that this cumulative probability concept becomes irrelevant.
• 13:55
  SPEAKER_02: All right.
• 13:56
  SPEAKER_02: And then how about in that situation, if you think there's equal probability of both, does that mean you hit your recognition threshold or no?
• 14:06
  SPEAKER_03: So maybe I can jump in here.
• 14:07
  SPEAKER_03: Once it's binary, it's all one or the other to Cassie's point.
• 14:11
  SPEAKER_03: So I think it's a simple example, probably the easiest one to imagine.
• 14:15
  SPEAKER_03: My transaction.
• 14:16
  SPEAKER_03: I entered into a transaction, a reorganization of some sort, and I believe it's a tax-free transaction.
• 14:24
  SPEAKER_03: Binary here suggests it's either tax-free or it's not tax-free, right?
• 14:29
  SPEAKER_03: So it's either tax-free or it's taxable.
• 14:31
  SPEAKER_03: There isn't a middle ground in that case.
• 14:33
  SPEAKER_03: So that's, I think, uh the easiest way to think about binary.
• 14:36
  SPEAKER_03: Think of it like a light switch.
• 14:37
  SPEAKER_03: It's either one thing or the other.
• 14:39
  SPEAKER_03: There's no in between.
• 14:40
  SPEAKER_01: And so since you've like, since remember, you had to go through the recognition threshold first.
• 14:45
  SPEAKER_01: So if that was more than 50%, then you'll recognize recognition, then you know that you know you're in a position where you're effectively probably going to recognize all of the benefit at that point in time.
• 14:57
  SPEAKER_02: All right, because before you even got to the step, you already said, I think it's more likely than not that I will be sustained in this position.
• 15:05
  SPEAKER_02: All right, very helpful.
• 15:07
  SPEAKER_02: So then anything else here that we should talk about related to recognition and measurement that you'd highlight?
• 15:13
  SPEAKER_03: So I think the other area that we've seen a lot of discussion around, Heather, goes back to recognition, and that's administrative practice and precedence.
• 15:23
  SPEAKER_03: So probably worth mentioning here.
• 15:26
  SPEAKER_03: Within recognition, I talked about having to consider all of the technical merits.
• 15:31
  SPEAKER_03: The FASBE also has this concept of administrative practice and precedence included in that technical merits level.
• 15:38
  SPEAKER_03: And so administrative practices and precedents represent situations in which a tax position could be considered a technical violation of the law.
• 15:49
  SPEAKER_03: And it's widely known, well understood, and a consistent practice of the taxing authority to accept the position.
• 15:57
  SPEAKER_02: Okay, so let me pause on that one too.
• 15:59
  SPEAKER_02: It seems a little counterintuitive that basically I'm going to take credit for something that I know is a violation of the law.
• 16:07
  SPEAKER_02: So does this come up very often?
• 16:09
  SPEAKER_02: And then where you kind of gave this caveat that has to be widely known and well understood that the and a consistent practice of the taxing authority to accept it, does it have to actually state that publicly, or how would you even know that that was the case?
• 16:24
  SPEAKER_03: Yeah, so two great questions.
• 16:26
  SPEAKER_03: The answers are not really and no.
• 16:28
  SPEAKER_03: So what does that mean?
• 16:31
  SPEAKER_03: Um, administrative practice.
• 16:33
  SPEAKER_03: You're right, it doesn't come up super often because it is a situation where the government is going against its own law.
• 16:39
  SPEAKER_03: So you wouldn't expect it to be very common.
• 16:42
  SPEAKER_03: Um, but it's also tough, and I guess along those lines, it can be difficult to assess whether something meets administrative and practice and precedent because the government isn't generally and doesn't necessarily need to broadcast that they are going to accept that.
• 16:59
  SPEAKER_03: Um, you know, it's possible they'd put out a publication.
• 17:02
  SPEAKER_03: We have actually seen that in history, um, but they don't necessarily have to in order for us to consider that.
• 17:08
  SPEAKER_03: So maybe it's helpful to do a couple of examples just to kind of describe what they are.
• 17:15
  SPEAKER_03: So one, and this one's actually included in GAP, um, but one very common is that under the US tax law, you're required to capitalize the cost of equipment.
• 17:28
  SPEAKER_03: There's no de minimis threshold given in the tax law.
• 17:31
  SPEAKER_03: However, it's very common for companies to have a de minimis threshold from their own procedures.
• 17:38
  SPEAKER_03: So, you know, if anything is less than, you know,$10,000, we're not going to capitalize it.
• 17:44
  SPEAKER_03: Um, so while there's nothing in the law that accepts that, it is commonly accepted by the IRS that companies have this de minimis threshold.
• 17:55
  SPEAKER_03: And so that's an example of administrative practice and precedence.
• 17:59
  SPEAKER_03: It's widely known, it's well understood by practitioners and preparers alike that the government commonly accepts that.
• 18:07
  SPEAKER_03: So that would meet, that would be an example.
• 18:09
  SPEAKER_03: The other area that we talk quite frequently about goes to nexus, particularly in a state situation and for US purposes.
• 18:18
  SPEAKER_03: So when a state, let's say you are subject to tax in that jurisdiction, it's very common for different states to have a threshold where they won't go back more than X number of years.
• 18:30
  SPEAKER_03: So if you are sought after by the government, they will look only at five years back or seven years back.
• 18:37
  SPEAKER_03: So you have to be a bit careful with that because that's not always um easy to determine with any particular state, and the states could all be different.
• 18:45
  SPEAKER_03: But Nexus is just another area where we might see that.
• 18:48
  SPEAKER_03: One caveat: just because an IRS agent um says it's okay, that is not administrative practice in precedent, right?
• 18:57
  SPEAKER_03: So that's just your experience on an audit.
• 19:00
  SPEAKER_03: That's not well known or widely understood, um, or I should say widely known and well understood.
• 19:08
  SPEAKER_03: So that wouldn't in and of itself be an administrative practice in precedent.
• 19:12
  SPEAKER_02: Okay.
• 19:12
  SPEAKER_02: That's all helpful.
• 19:14
  SPEAKER_02: But however, we're we're talking about this is only in one context.
• 19:19
  SPEAKER_02: But does this equally apply to assets and liabilities?
• 19:24
  SPEAKER_01: It does, and that's a great question.
• 19:26
  SPEAKER_01: And and a lot of people, I think, don't remember that.
• 19:29
  SPEAKER_01: So I'm I'm always reminding people that the county model we're talking about here is equally applicable to liabilities and assets.
• 19:39
  SPEAKER_01: Um, however, most commonly we are talking about liabilities.
• 19:43
  SPEAKER_01: And maybe just to be clear about that, is when you take, like, say you took a tax deduction that is a UTP, right?
• 19:52
  SPEAKER_01: You took that on your tax return, say it was$100.
• 19:55
  SPEAKER_01: Well, that reduced your taxable income by$100 on your tax return, which then in turn reduced your check that you were writing to the to the IRS, say um, so it reduced a liability.
• 20:08
  SPEAKER_01: Now, if you say that I have an uncertain tax position, so I can only recognize 50 or half of that benefit, that means that my tax payable per my tax return was X.
• 20:24
  SPEAKER_01: But I have to, I now have an uncertain tax position for more than that amount.
• 20:28
  SPEAKER_01: So I have to recognize a liability for that difference.
• 20:33
  SPEAKER_01: So when we're talking about liabilities here, we're frequently talking about UTPs because if someone is taking an uncertain tax position, it's usually to their benefit.
• 20:42
  SPEAKER_01: Um, but it can go the other direction.
• 20:46
  SPEAKER_01: I think most often where we see that is um where there might be an uncertain tax position that ends up impacting more than one jurisdiction.
• 20:56
  SPEAKER_01: Something like transfer pricing, we mentioned earlier, um transfer pricing arrangements between different entities that are part of the same consolidated financial statements.
• 21:08
  SPEAKER_01: Um, that might be something where you might end up recording a liability and an asset.
• 21:15
  SPEAKER_01: Um, so just to kind of level set for those who don't work with transfer pricing on a daily basis, um, it pretty much references just the determining of pricing between related entities for things like goods or services or intangibles.
• 21:31
  SPEAKER_01: And conceptually, what transfer pricing is is it's determining how much income to allocate to particular jurisdictions based on that transfer pricing agreement.
• 21:42
  SPEAKER_01: And it's it's almost never an exact science.
• 21:45
  SPEAKER_01: It's usually there's usually some acceptable range, and you have to kind of be along that continuum, the continuum of that range.
• 21:52
  SPEAKER_01: And so if you had an uncertain tax position in one jurisdiction related to transfer pricing, that Increases it relates to an increase in taxable income, that might give rise to a corresponding reduction in taxable income in another jurisdiction where the other side, the other party, resides to that transfer pricing agreement.
• 22:16
  SPEAKER_01: So you might have a liability on one side and an asset on the other.
• 22:21
  SPEAKER_01: I think a couple important things related to transfer pricing, though, and that situation is that number one, a company has to assess whether that both sides meet the most the more likely than not recognition threshold based on the law in each of those respective jurisdictions.
• 22:41
  SPEAKER_01: A liability in one country doesn't necessarily mean that you have an asset to record, you know, for a tax refund in another jurisdiction.
• 22:50
  SPEAKER_01: You know, but but if the facts are right, you can actually end up with one of each.
• 22:54
  SPEAKER_02: So simplistically, putting aside transfer pricing when you wind up with both, if I go back to your original example, so I have a deduction and I don't think it's going to be sustained, then I'm just out of luck.
• 23:08
  SPEAKER_02: I have to actually pay more tax to begin with.
• 23:11
  SPEAKER_02: But now I'm like, oh, I have this deduction.
• 23:13
  SPEAKER_02: I think it's more likely than not that my position will be sustained.
• 23:17
  SPEAKER_02: So I put the whole deduction on my tax return, even though maybe in my assessment, I say I only think 50% is going to be sustained.
• 23:28
  SPEAKER_02: So then in your example, I pay my tax based on what's on the tax return, but I say, uh, I actually paid less than I think I may ultimately need to pay.
• 23:36
  SPEAKER_02: So that's why I need to set up a UTP liability for this benefit that I took.
• 23:43
  SPEAKER_02: That's right.
• 23:43
  SPEAKER_02: All right.
• 23:44
  SPEAKER_02: It's a little confusing when you've worked through it if you're not a tax person because it also relates to a deduction, which you know, you have your underlying accounting for, but it's helpful to think about it that way.
• 23:55
  SPEAKER_02: So uh thank you for that.
• 23:57
  SPEAKER_02: All right.
• 23:58
  SPEAKER_02: So then all of this so far we've talked about is initial accounting for uncertain tax positions focused obviously on recognition and and measurement.
• 24:07
  SPEAKER_02: So, how do we think about changes and assessments?
• 24:10
  SPEAKER_02: Let's say get more information or something else.
• 24:12
  SPEAKER_02: How should you deal with that?
• 24:14
  SPEAKER_03: Yeah, Heather, it's an important point.
• 24:17
  SPEAKER_03: It is uh your assessment of an uncertain tax position is not one and done, it's not static.
• 24:22
  SPEAKER_03: So you need to assess uncertain tax positions based upon new information in every period.
• 24:29
  SPEAKER_03: Importantly, new information is just that.
• 24:32
  SPEAKER_03: It's not just a reinterpretation of information I had available or a reconsideration of something.
• 24:39
  SPEAKER_03: It needs to be something new, whether that's you know, maybe some new case development or a notice that came out, it needs to be some sort of new information.
• 24:49
  SPEAKER_03: But at the end of the day, if a company has a change in its uncertain tax positions based on that new information, it can cause, for example, recognition.
• 24:59
  SPEAKER_03: So if I'm thinking about it in the recognition step, though new information would be both recognition and measurement.
• 25:05
  SPEAKER_03: But in the recognition step, um, I need to recognize a position in the earliest of three periods.
• 25:14
  SPEAKER_03: So the period in which the new information causes me to meet the more likely than that recognition threshold, um, the statute of limitations lapses, so the position is done, or the tax position is effectively settled through examination, negotiation, or litigation.
• 25:31
  SPEAKER_03: So if one of those three happens in a period, I need to recognize the benefit in that period.
• 25:39
  SPEAKER_03: You know, effective settlement, it's not something that is a policy choice, and this is something that comes up.
• 25:46
  SPEAKER_03: You do need to recognize in the earlier of.
• 25:49
  SPEAKER_03: So you can't say, well, my position is I'm gonna wait till the statute of limitation lapses before I recognize the benefit.
• 25:55
  SPEAKER_03: That's actually not the standard.
• 25:56
  SPEAKER_03: The standard is very clear that it needs to be recognized in the earlier of those three periods or three criteria, however, you want to look at that.
• 26:05
  SPEAKER_02: So then given that, it's obviously important to know whether or not you've hit those criteria.
• 26:12
  SPEAKER_02: And the one where that kind of stood out to me there is what do we mean when we say effectively settled?
• 26:18
  SPEAKER_02: I noticed you didn't say settled, you just said effectively settled.
• 26:21
  SPEAKER_02: So what does that mean?
• 26:22
  SPEAKER_03: Yeah, it's a great distinction.
• 26:24
  SPEAKER_03: Um, so the standard provides that effective settlement uh is met when you meet all three conditions or three conditions, I should say.
• 26:34
  SPEAKER_03: So, first, any administrative procedures, appeals must be complete.
• 26:38
  SPEAKER_03: So the IRS, let's say if I'm talking about the US, they're done.
• 26:42
  SPEAKER_03: Um, they're done the audit.
• 26:44
  SPEAKER_03: The company does not, the second criteria does not intend to appeal the settlement in any way.
• 26:51
  SPEAKER_03: And it's remote that the tax authority would re-examine any aspect of the position.
• 26:57
  SPEAKER_03: So keep in mind, effective settlement only deals with the recognition step.
• 27:02
  SPEAKER_03: Companies, as you can imagine, have some concerns in the audit process, particularly on that third criteria on whether it's remote or not.
• 27:11
  SPEAKER_03: Whether it is remote, you have to understand the local country or the local jurisdiction that you're dealing with, because in each jurisdiction, their audit procedures uh might be different.
• 27:22
  SPEAKER_03: So you need to understand the jurisdiction that you're working with in.
• 27:26
  SPEAKER_03: But um, again, not optional.
• 27:28
  SPEAKER_03: So if you hit those three criteria, then you need to recognize the benefit of the position.
• 27:34
  SPEAKER_02: All right.
• 27:34
  SPEAKER_02: So then as you pointed out, that's all related to recognition.
• 27:38
  SPEAKER_02: Is there any, or how do we think about things that could impact measurement?
• 27:41
  SPEAKER_01: So new information can impact the measurement of UTPs, just like it can change your conclusion about recognition.
• 27:49
  SPEAKER_01: But similar to how new information impacts recognition, new information related to measurement needs to be truly new information.
• 27:59
  SPEAKER_01: It's not just a reassessment of the facts that existed at a previous balance sheet date.
• 28:06
  SPEAKER_01: So, just as an example, like a development might happen in some case law that could impact how you assess the amount of benefit that could be recognized.
• 28:18
  SPEAKER_01: Um, maybe that's because there's different possible outcomes now.
• 28:23
  SPEAKER_01: Maybe it's because it has an impact on how you assess the probabilities that you had originally assigned.
• 28:30
  SPEAKER_01: So, to the extent that that occurs, you have to reflect that as a change in measurement.
• 28:36
  SPEAKER_01: One area that can sometimes be challenging is where new information relates to um regulations issued by the Treasury, especially when it relates to proposed regulations.
• 28:52
  SPEAKER_01: So proposed regulations um come from Treasury, and they're really basically a view into how Treasury plans to interpret existing tax law.
• 29:06
  SPEAKER_01: So it's not official yet, it's a proposed regulation, it's not a final or a temporary one.
• 29:13
  SPEAKER_01: Um, and it is subject to a comment period.
• 29:15
  SPEAKER_01: So by the time it's actually finalized, it's possible that that you know the final regulation may read differently, and that that often does occur.
• 29:25
  SPEAKER_01: Um, but while proposed regulations don't have that full force of law behind them, like a final reg or a temporary reg would, the proposed regulations are indicative of the IRS's current thinking of how they interpret existing law.
• 29:43
  SPEAKER_01: And so, therefore, that's new information.
• 29:46
  SPEAKER_01: You know, proposed regulations are new information that companies need to consider when they're looking at their UTP assessment every period.
• 29:54
  SPEAKER_01: Now, in some instances, there might be a technical basis to take a position that's not in line with the proposed regulations.
• 30:04
  SPEAKER_01: And that generally requires the input of deep experts in the area of tax law that the proposed regulation is interpreting.
• 30:16
  SPEAKER_01: Um, but even if a company chooses not to apply the proposed regulations prior to them being finalized, or even if they can't choose to apply them, you know, under the law until they're finalized, uh, they need to consider the information as new information and whether it has any impact on the financial statements.
• 30:36
  SPEAKER_01: Um, to the extent that you're expecting that the proposed reg would have a material impact.
• 30:42
  SPEAKER_01: Transparent disclosure is pretty important if it's going to be material.
• 30:46
  SPEAKER_01: So this bottom line here comes down to a technical assessment of the sustainability of a tax position.
• 30:54
  SPEAKER_01: And companies need to consider uh the financial reporting effect of each tax position by applying the guidance in 740, which takes into account a lot of information.
• 31:05
  SPEAKER_02: And is this one, Cassie, where you could have like an accounting policy that I would say I don't take these into account until they're final, sort of across the board, or you really have to evaluate them on a case-by-case basis?
• 31:20
  SPEAKER_01: It's typically a case-by-case basis.
• 31:22
  SPEAKER_01: It's not really an accounting policy per se, because the standards telling that you have you have to consider it because it's new information.
• 31:30
  SPEAKER_01: It's just the answer might be once you consider it, that it doesn't impact your measurement.
• 31:35
  SPEAKER_01: I mean, it's it's possible that it might not.
• 31:37
  SPEAKER_01: Um, it's just something you can't just choose to say, oh, it's proposed, so I'm not gonna look at it.
• 31:42
  SPEAKER_02: I'm gonna just ignore it.
• 31:43
  SPEAKER_02: Okay, that's helpful clarification.
• 31:45
  SPEAKER_02: And then another question is often, you know, we've talked here about getting new information.
• 31:51
  SPEAKER_02: What if you get that new information after the balance sheet date?
• 31:54
  SPEAKER_02: So again, I'm doing my December 31, 21 financial statements.
• 31:58
  SPEAKER_02: And in February, before I issue my financial statements, I've found out something new.
• 32:04
  SPEAKER_02: How do you think about that?
• 32:06
  SPEAKER_01: Yeah, thankfully, this is one of the easier areas of UTPs because the standards are really clear about it.
• 32:11
  SPEAKER_01: So the standard says that developments that occur related to an uncertain tax position, developments that occur, new information that arises after the balance sheet date, but before the issuance of your financial statements are recognized in the period in which they occur.
• 32:29
  SPEAKER_01: So you would not go back and adjust your financial statements for something that happened after year end or period end.
• 32:35
  SPEAKER_01: Um however, it's always important when you when you think that you have new information that came up after year end.
• 32:44
  SPEAKER_01: The first thing you should do is say, are we sure that that we couldn't have known that at the end of the year or that didn't exist at the end of the year?
• 32:50
  SPEAKER_01: Because that that's always an important consideration.
• 32:53
  SPEAKER_01: Um sometimes it's obvious that it's new and it, you know, it didn't happen until after the end of the year, but sometimes it might just be that maybe you didn't find out about it until after the end of the year, but it happened before.
• 33:04
  SPEAKER_01: Um, and if it is in fact new information that happened after the balance sheet date, then if you expect the impact of that new information to be material in your financial statements in the period that you're going to recognize the impact, it's always obviously a good idea and required by GAP actually to disclose the impact if it will be material.
• 33:26
  SPEAKER_01: Um so, you know, subsequent events can be anything impacting recognition or measurement of an uncertain tax position.
• 33:35
  SPEAKER_01: Um, you know, sometimes we get a lot of questions around when the government issues new laws or regulations, like I was just talking about.
• 33:45
  SPEAKER_01: Um that's often an area where, you know, this type of question comes up a lot because, you know, people are trying to think about like, did it happen before?
• 33:55
  SPEAKER_01: You know, it's around the balance sheet date.
• 33:57
  SPEAKER_01: How do I have to think about it?
• 33:58
  SPEAKER_02: All right, that's helpful.
• 34:00
  SPEAKER_02: And you mentioned disclosures.
• 34:01
  SPEAKER_02: So I think that's a good segue into another topic, which is disclosure.
• 34:07
  SPEAKER_02: And in particular for U2Ps, I think that's a very important area to focus on.
• 34:13
  SPEAKER_02: And so, Jen, going back to you, what are some of the key things that you kind of think about when you're thinking about disclosures of these positions?
• 34:22
  SPEAKER_03: So, importantly, there are a number of required disclosures, but if we just think about the overarching kind of themes, I'd start with uncertain tax positions are really done on an aggregate basis.
• 34:35
  SPEAKER_03: So when you're looking at the uncertain tax benefit liability disclosed in the financial statements, that's going to relate to multiple jurisdictions and multiple positions.
• 34:46
  SPEAKER_03: Changes in the disclosure, they could be based on new uncertain tax positions, developments in old positions, maybe old positions being resolved, whether that's just paid or released, remeasurements of positions based on new information, statute of limitations lapsing.
• 35:05
  SPEAKER_03: So there's, you know, kind of categories of changes that typically happen, and disclosures are really focused on those categories.
• 35:12
  SPEAKER_03: But the key objectives of the disclosure is really, I think it goes back to even what Cassie was just saying, it's really about transparency.
• 35:19
  SPEAKER_03: That said, there are a few required disclosures that are probably worth mentioning on certain tax benefits.
• 35:25
  SPEAKER_03: There's a tabular reconciliation, and if you look at the standard, it breaks it into some of those categories that I just listed off.
• 35:32
  SPEAKER_03: Um, you'll have um identification of uncertain tax positions that you're required to disclose, I should say, positions where there will be it's reasonably expected to change within the next 12 months.
• 35:47
  SPEAKER_03: So that's um under current gap still.
• 35:50
  SPEAKER_03: Uncertain tax benefits that will impact the effective tax rate, you need to have a statement around that.
• 35:56
  SPEAKER_03: And then you still disclose tax years that are subject to examination and major tax jurisdictions.
• 36:02
  SPEAKER_03: So those are just some highlights.
• 36:04
  SPEAKER_03: Obviously, there's a fair bit of disclosure in this area.
• 36:07
  SPEAKER_01: Yeah, and that first one, that tabular reconciliation of UTBs of uncertain tax benefits, is probably the one that like has the most work associated with it because the guidance is pretty prescriptive about the things that you have to disclose in that reconciliation, what the line items are, and they have to be disclosed on a on a gross basis.
• 36:29
  SPEAKER_01: So one of the required line items is changes in current and prior year positions.
• 36:35
  SPEAKER_01: Actually, they might be two separate line items, um, one in current, one in prior.
• 36:40
  SPEAKER_01: Um, you also have to disclose settlements for amounts paid, um, or if you use a tax attribute, something like a net operating loss carry forward to settle that liability, that has to be disclosed.
• 36:54
  SPEAKER_01: And then any changes in your uncertain tax benefits that are driven by a lapse in the statute of limitation.
• 37:01
  SPEAKER_01: Um, and the other thing about the UTB reconciliation that makes it, I think, a bit unique coming from an auditing background is you know, I was always focused on like, all right, do my footnotes agree to my balance sheet?
• 37:14
  SPEAKER_01: Like it seems like pretty much everything in your footnotes, you tie it to something on your financial statements, right?
• 37:20
  SPEAKER_01: And the the UTB reconciliation table is a bit unique because often it's not going to directly agree to the amounts on the balance sheet.
• 37:30
  SPEAKER_01: And that's, you know, there could be a couple of reasons for that, but the most common reason is that on your balance sheet, you're you're reporting one line item generally, and it's net you're netting uncertain tax position liabilities.
• 37:44
  SPEAKER_01: Um, often sometimes if you if you have different tax assets that you're going to use to, so to speak, pay for those tax position liabilities, um, like a net operating loss is going to pay for that that tax liability if it got triggered.
• 38:02
  SPEAKER_01: You're required to net that on the balance sheet.
• 38:05
  SPEAKER_01: But here, as I just mentioned, there's gross disclosures about when you're going to use and when you've used an NOL to settle something.
• 38:13
  SPEAKER_01: And then, you know, you have to include the a line item for any changes and the uh the UTEB on a gross basis.
• 38:22
  SPEAKER_01: So um those types of differences are you know can can take some effort to kind of reconcile and the between like the footnotes and the balance sheet.
• 38:32
  SPEAKER_02: So one clarifying question maybe for you, Jen, is just listening.
• 38:37
  SPEAKER_02: And in particular, you know, I know that companies are not allowed to think of detection risk, but and yet I would think if I were the the tax department, I may not want to clearly disclose, oh, I have this uncertain tax position related to X, because then, you know, the tax authority can just read my footnote and they're gonna, it's like a roadmap.
• 38:59
  SPEAKER_02: So how do you answer those types of questions when there's reluctance to disclose specific information?
• 39:05
  SPEAKER_02: Or because it's aggregated enough, maybe that doesn't come into play.
• 39:09
  SPEAKER_03: Well, I think the question does come up, Heather, and I think you just head on it.
• 39:13
  SPEAKER_03: I mean, as a starting point, it's all done in aggregation.
• 39:16
  SPEAKER_03: It's not as if you're calling out an individual position per se.
• 39:20
  SPEAKER_03: At the same time, with all disclosures, transparency is important.
• 39:24
  SPEAKER_03: So you will see companies from time to time where maybe they receive a significant proposed adjustment by a government, they might call that out.
• 39:34
  SPEAKER_03: You could see a situation where a company is specifically calling out if they're um it maybe they have a case that's very public and it's been going through the court systems for some time.
• 39:45
  SPEAKER_03: You'll see companies call those out specifically.
• 39:48
  SPEAKER_03: So there is a fine balance, but when the original guidance that's it is codified in ASC 740, so it was called FIN48, when FIN48 came out, that aggregate table that we've just talked about was striking, attempting to strike a balance between aggregation of positions and dealing with confidentiality for good reasons, but also balancing that need for transparency.
• 40:14
  SPEAKER_03: So those categories that we've just talked a little bit about, so that a company or sorry, a user of the financial statements could see how those have changed during the year.
• 40:23
  SPEAKER_03: So uh it's a fine balance.
• 40:26
  SPEAKER_02: Yes, but I guess key point there is transparency.
• 40:29
  SPEAKER_02: That is the objective here.
• 40:30
  SPEAKER_02: So something to keep in mind.
• 40:32
  SPEAKER_02: All right.
• 40:33
  SPEAKER_02: Well, Jen Cassie, it's always very interesting to discuss.
• 40:36
  SPEAKER_02: I definitely learned a few things today.
• 40:39
  SPEAKER_02: Just to kind of wrap things up, then I know this is a complicated area.
• 40:43
  SPEAKER_02: I know you talked to a lot of engagement teams and clients about issues in this area.
• 40:49
  SPEAKER_02: So I'm gonna ask you each the same question, is just what would be your key takeaway for someone listening?
• 40:55
  SPEAKER_02: And Jen, I can start with you.
• 40:58
  SPEAKER_03: Sure, Heather.
• 40:59
  SPEAKER_03: So I for me, it's really about documentation.
• 41:02
  SPEAKER_03: We've talked a lot today about the level of judgment that goes into each of these assessments.
• 41:07
  SPEAKER_03: Somebody can challenge your judgment, but they can't challenge that you made a judgment, a judgment if you have the proper documentation.
• 41:14
  SPEAKER_03: So we talked about the need to be updating your assessments at each balance sheet date.
• 41:19
  SPEAKER_03: I think it's really important for companies to both have a process to maintaining and updating that documentation they have, but also to basically have a process to be tracking new developments so that you're catching that new information in the period in which it comes out.
• 41:35
  SPEAKER_03: So that documentation should be refreshed and updated every period.
• 41:39
  SPEAKER_03: And I think it's probably important to just stress that.
• 41:42
  SPEAKER_02: Yes, great advice there.
• 41:44
  SPEAKER_02: And Cassie, how about from your perspective?
• 41:47
  SPEAKER_01: I think I'd say focus on disclosures.
• 41:49
  SPEAKER_01: I mean, the disclosures are pretty robust here.
• 41:52
  SPEAKER_01: And um I think there's been a lot of feedback from investors just over the years that one of the things that they are most interested in from just disclosures generally is understanding risk.
• 42:04
  SPEAKER_01: And so here with uncertain tax positions, you know, you're really talking about the risk that you might have a tax exposure that that you're you will have to pay in the future.
• 42:15
  SPEAKER_01: And um I think the more robust the disclosures are, the more investors feel like they're they're useful disclosures.
• 42:24
  SPEAKER_02: Also very helpful.
• 42:25
  SPEAKER_02: So before we wrap things up, I'm happy to say I have a few stump the guest questions.
• 42:31
  SPEAKER_02: We kind of dropped this segment for a few podcasts.
• 42:34
  SPEAKER_02: I think, Jen, you escaped the last one that you did with me, but it's back.
• 42:38
  SPEAKER_02: So we'll see how you guys do.
• 42:41
  SPEAKER_02: Who became speaker of the house in the year that Fin 48 became effective for public companies?
• 42:49
  SPEAKER_02: If you think you might be able to guess.
• 42:50
  SPEAKER_02: So what I I guess first maybe start.
• 42:52
  SPEAKER_02: What year did FIM48 become effective for public companies?
• 42:55
  SPEAKER_02: Do you guys remember?
• 42:57
  SPEAKER_03: Oh, let's see.
• 42:58
  SPEAKER_03: It became effective 2000.
• 43:01
  SPEAKER_03: So I was gonna say 2007.
• 43:03
  SPEAKER_02: So 2007.
• 43:06
  SPEAKER_02: So then, okay, so now we know we're talking about 2007.
• 43:10
  SPEAKER_02: Any guesses?
• 43:11
  SPEAKER_02: I I will save you guys.
• 43:13
  SPEAKER_02: It was actually Nancy Pelosi, which I would not have gotten that right either.
• 43:18
  SPEAKER_02: So, like I said, no shame.
• 43:21
  SPEAKER_02: Exactly.
• 43:22
  SPEAKER_02: I should have known.
• 43:23
  SPEAKER_02: And that and that's why I thought you might it's like, well, we all know she's fun for a long time, but in any event.
• 43:28
  SPEAKER_02: All right.
• 43:29
  SPEAKER_02: So the second one, this one is pop culture, which I would definitely get this one wrong.
• 43:33
  SPEAKER_02: Cassie's gonna get this one.
• 43:34
  SPEAKER_02: Okay.
• 43:35
  SPEAKER_02: What was the top box office movie in the year that the FASB issued Fin 48?
• 43:41
  SPEAKER_02: I'm just gonna pick Jurassic Park because I don't guess this one is Pirates of the Caribbean, Dead Man's Chest.
• 43:49
  SPEAKER_02: Oh Lord.
• 43:50
  SPEAKER_02: So in any event, glad you guys played along.
• 43:54
  SPEAKER_02: And as always, appreciate you joining me today.
• 43:57
  SPEAKER_02: Thanks so much for all your insight.
• 44:01
  SPEAKER_02: That's our show for today.
• 44:03
  SPEAKER_02: Join me this Thursday for more ESG content as we sit down with the current CEO of the Global Reporting Initiative.
• 44:10
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• 44:21
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• 44:28
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• 44:47
  SPEAKER_02: From Thought Leadership of PWC, I'm Heather Horn.
• 44:50
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