Private Companies Adopting FIN 48 Should Copy Dick "Night Train" Lane

Recently, I had the privilege of meeting Mr. Richard Lane. Richard is the son of Dick “Night Train” Lane. Most of you have probably never heard of Dick “Night Train” Lane, but growing up in Detroit he was a legend.

Dick “Night Train” Lane was a cornerback in the NFL, perhaps the greatest cornerback that ever played the game. His 1952 interception record still stands today and in 1969, “Night Train” was voted the best cornerback in the NFL’s first 50 years. Dick “Night Train” Lane was well known for his ferocious tackling. Receivers playing against “Night Train” thought first about his tackling and then about catching the ball. He played defense like a lion, but also knew his expectations.

FIN 48 is about playing defense too. Making sure your company’s tax positions are properly recorded in the financial statements is really a defensive play. Before FIN 48, we worried considerably less about the “more likely than not standard” and the measurement of a company’s tax positions. Today, FIN 48 has us looking over our shoulders and wondering where the “Night Train” is.

Like a lot of accounting pronouncements, FIN 48 first applied to public companies. Public companies have a pretty firm grasp on the FIN 48 adoption process after dealing with it for a few years. Private companies, on the other hand, need to adopt FIN 48 for post-December 15, 2009 yearends. If you’re a private company that has not yet adopted FIN 48, get some help quick!

Yogi told us that “you can observe a lot just by watching.” Ergo, what’s to be learned from the public company experience of adopting FIN 48? I’m going to set out for you some of my most important observations about the FIN 48 adoption process. Don’t be surprised if most of what I’m about to tell you, you already know. But, if you follow some of these recommendations, you will save your company valuable time and thousands of dollars.

Technical Highlights
First, we’re not going to go through a technical discussion of FIN 48. Reams of technical information already exists on the web as reference material for you. Instead, this discussion is focused more on adopting and implementing FIN 48. I’m going to give you some very specific recommendations that will make this process much easier for you. There are two noteworthy differences between the financial statement reporting requirements for public companies versus private companies. These are:

Private companies are exempt from disclosing the total amount of unrecognized tax benefits when a tabular reconciliation disclosure requirement is not presented; and Private companies are exempt from disclosing that the change in accounting for uncertain tax positions has no material effect on the financial statements.

First, Set Clear Expectations
Focusing on expectations is essential for a smooth and orderly adoption of FIN 48. In fact, it’s the most significant take away I have for you. Success is virtually assured, provided you and your team know your expectations. This is the gold standard and you’d be surprised how often it is overlooked.

If the person you’ve engaged for the FIN 48 analysis and adoption process did not begin by calling a team meeting with your auditing firm and internal staff, rethink the entire process. Talk about wasting time and money! If you embark on the FIN 48 adoption without a coordinated team effort, you’ll likely encounter some costly missteps.

Here are my top three recommendations for a coordinated FIN 48 team effort.

Set clear expectations – Be defensive, by establishing clear expectations and deliverables. This includes work product, timelines, deliverables, fees, and what the acceptable level of documentation required by the auditing firm is. In short, develop a work plan. Commit to writing – Once the expectations are set, commit them to writing. Have all team members acknowledge their expectations and deliverables. Don’t be afraid to hold people accountable. Trust, by verify! Schedule regular status report check-ins with responsible team members, reporting the status of their assignments and responsibilities.

Be Practical
Understanding private companies and what’s important to the owners and founders requires a far different level of sensitivity than that of a public company. Professionals must know the company and its key performance drivers. Owners must convey the hot buttons and specific needs of the company.

From my experience, private company entrepreneurs have little appreciation (almost disdain) for financial statement accounting issues and reporting. What these entrepreneurs want to know is their company’s cash position, payables, and the required cash for tax payments. These mavericks will, however, appreciate a high-level approach regarding FIN 48, as they do want to know about significant tax return risks. But, they will not likely be enamored with the pages and pages of FIN 48 tax analysis that makes the accountants feel good.

Private companies generally don’t have internal tax personnel, good internal controls, and experience with tax authority audits. Additionally, private companies are likely to have a tendency to be more aggressive in their tax positions. As a result, reliance on the professional takes on more significance. Accordingly, a coordinated working arrangement among internal personnel, the auditing firm, and the FIN 48 advisor must be practical, yet adhere to FIN 48 standards.

Here are my recommendations for a practical FIN 48 approach.

Review all open year tax returns. This review should look at book/tax differences, elections, credits, and tax return statements. Review the detailed trial balances for all open years. Look for any new book/tax differences and unidentified issues. Review the FAS 109 working papers, specifically the cumulate book/tax differences, carryovers, and credits. Review the company’s accounting policies. Review prior year’s financial statements. Review prior year’s acquisitions and dispositions. Review any prior year tax authority audits and correspondence related thereto. Hold discussions with legal, human resources, and accounting personnel. Document the findings.

Regarding documentation, it’s imperative to know early on the acceptable level of documentation required by your auditing firm. I’ve seen a plethora of approaches. The documentation needs to meet the FIN 48 standards, but you don’t want it to be overkill. A public company approach to documentation is overkill for a private company.

Timing and the future
Private companies that haven’t yet embarked on FIN 48 better go on offense. It’s not too late, but it’s probably too late to avoid a fire drill. There are about 60 to 90 days left to complete the adoption process. Remember, FIN 48 is required for the December 31, 2009 financial statements, so you’d better get going!

In future years, private companies should not have to retrace or redo the adoption process. This expense can be avoided by mapping out a prudent approach in year one. Barring a change in facts or information, all that should be required in future years should be memorializing any items that have changed.

Private companies looking to save thousands of dollars should take a page out of “Night Train’s” book. Know your expectations and play good defense. Otherwise, expect to waste some time and money.

This publication contains information in summary form and is intended for general guidance only. It is not intended to be a substitute for detailed research nor the exercise of professional judgment. Neither BPM nor any member of the BPM firm can accept any responsibility for loss brought to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.