Running Head: PUBLIC DISCLOSURE 1
Milestone Three: Public Disclosure for Uncertain Tax Positions
PUBLIC DISCLOSURE 2
Recording Financial Statement Reserves
A public company may have to record its financial statement reserves under diverse
circumstances. The specific circumstances and conditions for recording financial statement
reserves pertaining to tax contingencies have been highlighted in Financial Accounting
Standards (FAS) No. 5. The two conditions that need to be taken into consideration when it
comes to loss contingency include the reasonable estimation of the loss which could be the
result of an adverse outcome and the information that is available before the financial
statement issuance is indicative of probable impairment of an asset or incurrence of a liability
(FASB, n.d.). A suitable example is a firm that litigates an income tax issue.
In case, a business entity prepares for the court date on the basis of prior decisions relating to
only one side of the lawsuit, it may be determined that it has to pay $ 5 million as additional
tax. While observing the case from the opposite side, it may be open for interpretation. Based
on the interpretation, the entity may have to pay taxes amounting to $ 10 million in addition to
$ 5 million. In case such a situation arises, the firm will need an accrual of $ 5 million because
of the consideration of reasonable estimates pertaining to loss. The entity must disclose
losses, especially if there exist additional taxes that have to be paid. Proper disclosures are
instrumental in case of uncertain tax positions of entities and the entity has to report in its
financial statements that the disclosure was accrued.
Form 10-Q and Form 10-K
The impact of uncertain tax positions can be felt on the current Form 10-Q and Form
10-K of the business entity. Uncertain tax positions have the potential to influence the entity’s
position relating to deferred tax, assets as well as liabilities that are presented in the balance
sheet. According to ASC 740, the tax bases must be used for the purpose of computing the
deferred tax assets and liabilities, in addition to other amounts that are either receivable or due
PUBLIC DISCLOSURE 3
from tax authorities for previous tax positions (FASB.ORG., n.d.). A business has to use
Forms 10-Q and 10-K, and the disclosure must state that the entity does not identify an asset
or a liability for deferred tax implications of temporary differentiation between the tax basis
relating to assets and liabilities amounts in the financial statements.
The temporary differences may ultimately give rise to taxable deductible amounts in
the upcoming years, i.e., when the amounts that have been reported are either settled or
recovered. The recognition of the tax impact on an uncertain tax position is most likely not
the tax position that is reported and sustained by the Internal Revenue Service (IRS) for
examination purposes. The rules relating to ‘Accounting for Uncertainty in Income Tax’,
which is highlighted in FIN 48, have to be applied since it can provide as a guidance to the
business firm regarding its tax position (Deloitte, n.d.).
Recording reserves for the current tax year
When the public company has to finalize its appeal, it is essential for the business to
make a number of changes so that it can account for per diem reimbursements that relate to
travel expenses. In case of such an event, the reserve will have to be recorded in the financial
statements of the business so that it will be possible to account for any variance that may arise
between the new accounting method and the old accounting method. In addition to this, in
case the per diem payments are still the same, the only difference that is likely to arise is how
the business entity intends to substantiate its expense items. In this situation, there is no need
for the public company to record the reserve in its financial statements in the current tax year.
No issue will arise in case the reserve is not reflected in such a situation. d
Recording reserves for prior tax years
On the basis of the particular scenario involving the business entity and the Internal
Revenue Service (IRS) relating to the audit of previous tax returns, it has to be ascertained
PUBLIC DISCLOSURE 4
whether the $ 5 million excess deduction of per diem expense was the result of inaccurate
substantiation of lodging, entertainment, and meal expenses or not. As per Financial
Accounting Standards Board (FASB), such a situation is probable, which is indicative of the
fact that it might be challenging to ascertain the loss. As the $ 5 million deduction that has
been determined by the IRS has been overstated, the amount which encompasses the
overstated deductions is not equivalent to $ 5 million. When there has to be a deduction, it
does not necessarily have to be the exact amount that has been identified for the repayment
purpose. On the basis of the available information, it is imperative to ascertain the exact
difference that exists between the tax returns and details in the financial statements. An
accurate understanding of what will be owed by the company to the Internal Revenue Service
is essential, although it might be challenging to ascertain. d
In case the business entity makes the decision to make an appeal., it is fundamental to
bear in mind that the exact deduction value cannot be determined until the appeal process has
come to an end. In such a scenario, the business entity has to take into consideration the
elements such as interests and penalties. For instance, in case the final decision that has been
taken by the court is in favor of the Internal Revenue Service, it may lead to the accumulation
of the penalties as well as the interest amount that it will have to pay at the end of the appeal
(Internal Revenue Service., n.d.). The business firm needs to take into account these aspects
since they have the potential to influence the ultimate repayment amount that it has to pay
after the appeal process has come to an end and the final judgment has been passed by the
court of law.
PUBLIC DISCLOSURE 5
Reference
Fin 48: Accounting for uncertainty in income taxes. Deloitte. (n.d.).
https://dart.deloitte.com/USDART/pdf/ad511c06-3f31-11e6-95db-c562131e07c9
Income taxes (topic 740) - fasb.org. (n.d.).
https://fasb.org/document/blob?fileName=Prop_ASU-Income_Taxes_(Topic_740)-
Disclosure_Framework-
Changes_to_the_Disclosure_Requirements_for_Income_Taxes.pdf
Summary of statement no. 5. FASB. (n.d.).
https://www.fasb.org/page/PageContent?pageId=%2Freference-
library%2Fsuperseded-standards%2Fsummary-of-statement-no-5.html&bcpath=tff
Your appeal rights and how to prepare a protest if you disagree. Internal Revenue Service.
(n.d.). https://www.irs.gov/pub/irs-pdf/p5.pdf
