At its October 1, 2008 meeting, the Financial Accounting Standards Board (FASB) voted to propose a one-year deferral of the effective date of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, for pass-through entities such as Subchapter S corporations, partnerships, and LLC entities. After that decision was made, questions were raised as to whether such a proposal would apply to all entities within a chain of entities if a pass-through entity existed anywhere within the chain. Additionally, questions were raised regarding whether cooperatives, real estate investment trusts, and hedge funds were considered to be pass-through entities.
To avoid the complexities of addressing how to define the term “pass-through,” the FASB has reconsidered the scope of its proposed one-year deferral of the effective date of FIN 48 for certain private enterprises. At its October 15, 2008 meeting, the FASB voted to expand the scope of the proposed deferral so that it now includes all private entities, including privately owned C corporations. Under the expanded proposal, FIN 48 would be effective for private entities for annual periods beginning after December 15, 2008 if they have not yet issued a full set of U.S. GAAP annual financial statements incorporating the recognition, measurement, and disclosure requirements of FIN 48. Early adoption is still permitted.
The definition of “nonpublic enterprise” for this deferral is expected to be the same as the definition in FASB Statement No. 109, Accounting for Income Taxes, which are entities other than (a) those with debt or equity securities that trade in a public market, (b) those who are filing to register securities, and (c) conduit bond obligors for conduit debt securities that are traded in a public market. Our firm therefore believes that nonpublic consolidated entities of public companies that apply U.S. GAAP will not be eligible for the deferral for their stand-alone financial statements. U.S. subsidiaries of a foreign public company that applies U.S. GAAP and conduit bond obligors for conduit debt securities that are traded in a public market also would not be eligible for the deferral. However, a nonpublic company that is wholly- or majority-owned by a publicly traded company and that is included in the public company’s consolidated financial statements at fair value (for example, a private company owned by a publicly traded private equity group) would be eligible for the deferral for its stand-alone financial statements.
The proposed deferral of FIN 48 will be exposed for public comment through a proposed FASB Staff Position (FSP). Upon issuance, the FSP is expected to be subject to a 30-day public comment period after which the FASB will make its final decision on whether to delay the effective date for private entities. Since the delay is not “official” until the final vote by the FASB, any financial statements issued before then for periods that began after December 15, 2007 must include the adoption of FIN 48. When the FSP is issued for public comment, Insights will summarize the important provisions of the FSP.
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