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The assessment of an uncertain tax position is a continuous process, which does not end with the initial determination of a position’s sustainability. As of each balance sheet date, unresolved uncertain positions must be reassessed for both recognition and measurement. Management must determine whether the factors underlying the sustainability assertion have changed and whether the amount of the recognized tax benefit is still appropriate.
With regard to reassessing recognition, ASC 740-10-25-8 provides guidance on the timing and types of changes that could cause an entity to recognize a tax benefit due to a change in the sustainability of the tax position.

ASC 740-10-25-8

If the more-likely-than-not recognition threshold is not met in the period for which a tax position is taken or expected to be taken, an entity shall recognize the benefit of the tax position in the first interim period that meets any one of the following conditions:
a. The more-likely-than-not recognition threshold is met by the reporting date.
b. The tax position is effectively settled through examination, negotiation, or litigation.
c. The statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.
Accordingly, a change in facts subsequent to the reporting date but prior to the issuance of the financial statements shall be recognized in the period in which the change in facts occurs.

In addition, an uncertain tax position does not need to be legally extinguished and its resolution does not need to be certain to be recognized, derecognized or measured. Changes in the expected outcome of an uncertain tax position must be based on new information, and not on a mere re-evaluation of existing information. New information can relate to developments in case law, changes in tax law, new regulations issued by taxing authorities, interactions with the taxing authorities, or some other development. Such developments could potentially change the estimate of the amount that is expected to be sustained or to cause a position to cross over the recognition threshold (i.e., either the position’s sustainability becomes more-likely-than-not or the position ceases to meet the recognition threshold).
New information would exist if management’s previous evaluation was fully informed and based on all relevant facts and if, in the intervening period, legislative developments or developments in case law gave rise to the different interpretation by outside counsel. New information requires a new judgment on whether the recognition threshold has been met.
Example TX 15-5 illustrates consideration of whether a proposed settlement with the taxing authority provides new information.
EXAMPLE TX 15-5
Consideration of a tentative “global” settlement with a taxing authority in measuring uncertain tax positions
Company A has multiple uncertain tax positions, all of which have been assessed under ASC 740. Some tax positions met the recognition threshold of ASC 740, while other positions did not. The individual tax positions are not similar and are not interdependent. Positions that did not meet the recognition threshold were fully reserved (i.e., no benefit has been recognized). The taxing authority is conducting an audit of three years in which the positions were taken.
Company A has been in negotiations with the taxing authority and, as of the end of the current reporting period, the parties have reached a tentative “global” settlement agreement. The agreement would settle all positions within the three tax years under examination, and close out the audit for those years. While the Company believes they have reached an agreement with the taxing authority’s examination team, the agreement is subject to another level of governmental review before it becomes final and binding.
Company A determined that the additional level of review is substantive, and could result in the agreement being changed or withdrawn (by either party). As a result, Company A determined that the uncertain tax positions that have not met the recognition threshold are not considered “effectively settled” as described in ASC 740-10-25-10. In addition, no new information came to light during the examination process that would cause Company A to change its assessment of the technical merits of any of the individual uncertain tax positions. Therefore, no adjustment will be made to the tax positions that have not met the recognition threshold.
For positions that have met the recognition threshold, should Company A adjust its measurement of the related benefit of those positions based upon the tentative global settlement agreement?
Analysis
It depends. Company A must determine whether the proposed global settlement changes their assessment of the expected outcome for each tax position that has met the recognition threshold. In making this determination, Company A should consider its expected course of action, and related expected outcome, if the global settlement proposal is withdrawn or changed in the review process.
While ASC 740-10-35-2 requires companies to continually remeasure tax positions “based on management’s best judgment given the facts, circumstances, and information available at the reporting date,” subsequent changes must be based on “new information.”
In this case, Company A must determine if the global settlement proposal is part of the on-going examination and negotiation procedures and whether it constitutes “new information” that would change the assessment of the outcome of any individual tax position. In this example, negotiations were conducted on a global basis (i.e., considering all positions in the aggregate). Consequently, Company A would likely conclude that there was no new information with respect to any of the individual tax positions that caused management to change their previous assessment. As a result, no adjustment would be made to the measurement of the related benefit.

15.5.1 Impact of a jurisdiction’s dispute-resolution process

In addition to monitoring developments in the technical merits of a position, entities must monitor the progress of the dispute-resolution process as part of their reassessment of the recognition threshold to determine whether a tax position is effectively settled through examination, negotiation, or litigation.
There may be phases in the taxing authority’s examination process that provide new information, which would result in recognition or remeasurement of a tax position or, in some cases, de-recognition of a previously recognized tax position. Entities must also consider if recognition of tax benefits or remeasurement of previously recognized tax benefits is appropriate when a tax examination is closed if the relevant statute of limitation for assessing taxes is still open. This determination is critical because, in many cases, a taxing authority completes its examination of a tax year before the statute of limitations expires.

15.5.2 Effective settlement of a tax position

Tax positions can be effectively settled upon examination by a taxing authority, which may impact an entity’s reassessment of whether the tax position should be recognized or not. Settlement is assessed on a position-by-position basis. To be considered “effectively settled,” the conditions in ASC 740-10-25-10 must be met.

ASC 740-10-25-10

As required by paragraph 740-10-25-8(b), an entity shall recognize the benefit of a tax position when it is effectively settled. An entity shall evaluate all of the following conditions when determining effective settlement:
a. The taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position.
b. The entity does not intend to appeal or litigate any aspect of the tax position included in the completed examination.
c. It is remote that the taxing authority would examine or reexamine any aspect of the tax position. In making this assessment management shall consider the taxing authority’s policy on reopening closed examinations and the specific facts and circumstances of the tax position. Management shall presume the relevant taxing authority has full knowledge of all relevant information in making the assessment on whether the taxing authority would reopen a previously closed examination.

In analyzing whether a tax position meets the three conditions of ASC 740-10-25-10 and can therefore be considered effectively settled, certain key considerations should be noted.
Tax position is not specifically examined
As stated in ASC 740-10-25-11, a tax position does not need to be specifically reviewed or examined by the taxing authority during the examination of a tax year in order for it to be considered effectively settled through examination.
In cases in which the position has not been specifically reviewed or examined by the taxing authority, additional judgment may be necessary to conclude whether the likelihood that the taxing authority would subsequently examine the position is remote. It is also important to remember that this conclusion must be reached under the presumption that the taxing authority has full knowledge of all relevant information.
Completion of examination and other procedures
If a position is challenged, the resolution process in many jurisdictions can potentially involve several stages and various government departments, each of which might be empowered to overturn or modify another department’s ruling. A previously unrecognized tax benefit can be recognized when an entity is able to conclude that a tax position is “effectively settled.” Under the US federal income tax system, Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, is used upon completion of an IRS examination to indicate the taxpayer’s agreement with the revenue agent’s proposed adjustments and agreement to pay any deficiency. The Revenue Agent’s Report (RAR) accompanies the Form 870. By signing the Form 870, the taxpayer waives the right to a notice of deficiency and thus permits the IRS to assess the tax immediately. In effect, this represents the closing of the IRS examination upon acceptance by the IRS. Generally, the IRS will only re-open a closed case if (1) there is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact, (2) the closed case involves a clearly defined, substantial error based on an established service position existing at the time of the examination, or (3) other circumstances exist that indicate that a failure to re-open the case would be a serious administrative omission.
We generally expect the closing of an IRS examination to constitute effective settlement of a position taken in the examined year when not being appealed, other than cases involving continued governmental review (e.g., Joint Committee) or years in which there was no tax payable (e.g., NOL years).
When evaluating whether the taxing authority has “completed its examination procedures” (as discussed in ASC 740-10-25-10(a)), NOLs and tax credit carryforwards need to be evaluated differently. To illustrate, assume that a US entity generated an NOL carryforward of $500 on its tax return for a particular year, but only $400 of that amount was recognizable in the financial statements because of an uncertain tax position that totaled $100. The uncertain position is not examined by the IRS in the subsequent examination, and the examination is later closed.
In this case, it is unlikely that the entity would be in a position to conclude that the unrecognized benefit of $100 was effectively settled upon closure of the examination for the year in which the NOL first arose. This is because the IRS not only has the ability to examine or reexamine the positions that led to the generation of the NOL and tax credit carryforwards, but in many cases will examine or re-examine those positions when they are utilized on a future year’s tax return. The IRS can perform the re-examination even if the statute of limitations for the year of generation has since expired. Other jurisdictions may have the same or a similar ability based in tax law, regulations, or judicial doctrine.
Assessing whether an appeal is effectively settled
Entities that file an appeal similarly need to assess when the appeal is effectively settled. At the conclusion of an appeal, the IRS appeals division issues a Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment. Form 870-AD is used almost exclusively by the appeals division and differs from Form 870. Specifically, Form 870-AD states that the case will not be reopened by the IRS unless, among other things, there was “fraud, malfeasance, concealment or misrepresentation of a material fact,” “an important mistake in mathematical calculation,” or “excessive tentative allowance of a carryback.”
We generally believe sign-off on Form 870-AD constitutes effective settlement. Even if the tax position had not been examined, the likelihood that the IRS would challenge a position after receiving a Form 870-AD would generally be remote. The instructions for Form 870-AD indicate that by signing, the taxpayer is agreeing not to re-open the referenced tax years and the IRS will only re-open the tax years in very limited circumstances.
Ongoing reassessment
ASC 740-10-40-3 requires the continuous re-evaluation of tax positions that were previously determined to be “effectively settled.” An entity should re-evaluate a tax position that was effectively settled if it believes that a taxing authority may examine or re-examine the tax position, or if the entity intends to appeal or litigate any aspect of the tax position. Under these circumstances, the criteria in ASC 740-10-25-10 would no longer be met and the tax position would no longer be considered effectively settled.
ASC 740-10-25-12 acknowledges that an entity may obtain information during an examination that would enable it to change its assessment of the technical merits of a tax position or of similar tax positions taken in other periods. However, the fact that a position has been effectively settled for a given year should not be used as a basis for concluding that similar tax positions taken in future years can be recognized. The fact that a position was effectively settled for a particular year does not in and of itself constitute “new information” that would allow the entity to recognize the benefit from similar positions taken in subsequent years. See TX 15.5.3.3 for additional information.

15.5.3 Impact of amendments and audits

When recording the impact of an amended return, entities should reconsider the potential impact on the recognition and measurement of uncertain tax positions. In addition, entities being audited or that have been audited by a taxing authority or that invoke certain review processes should also revisit the recognition and measurement of their uncertain tax positions.

15.5.3.1 Amended return/tax receivable

TX 15.3.1.9 discusses the application of ASC 740’s recognition and measurement criteria to refund claims. Generally, filing an amended return results in a tax receivable. When the filed (or expected-to-be-filed) amended return includes an uncertain tax position, the recognition, derecognition, and remeasurement of the receivable should be assessed under ASC 740’s recognition and measurement criteria. We believe that the threshold for the recognition of the associated tax benefit should be the same, regardless of whether the accounting entry results in a tax receivable, a decrease in a liability for an unrecognized tax benefit, or a current tax payable. However, obtaining the tax benefit might involve additional procedural steps (e.g., in the US federal tax jurisdiction, approval by additional government authorities, such as the Joint Committee on Taxation that serves under the US Congress), which might affect the risk that an advantageous lower-level decision could be reversed.

15.5.3.2 Competent authority

A competent authority (CA) resolution is a formal agreement between the taxing authorities of two countries interpreting provisions in a bilateral income tax treaty for the elimination of double taxation. A resolution by a CA is applicable to entity-specific facts and circumstances. As discussed in TX 15.3.1.1, a CA resolution is considered authoritative tax guidance that can support recognition. Entities can invoke the CA process when they believe that the actions of the taxing authorities cause a tax situation that was not intended by a treaty between two countries or when they need specific treaty provisions to be clarified or interpreted. The fact that the CA has agreed with an entity’s position would presumably provide sufficient evidence to meet the recognition threshold. However, this might still be subject to further approvals in certain tax jurisdictions (e.g., the approval of the Joint Committee on Taxation for US federal tax refunds over a defined amount).

15.5.3.3 Relevance of resolution experience to future periods

The resolution of an uncertain position in a given audit cycle should also be assessed for its relevance to future periods. For example, the resolution of an uncertain tax position might involve new or additional interpretation (or clarification) by the taxing authority of the relevant authoritative tax guidance and its applicability to the uncertain tax position. This new or additional information might provide evidence supporting the technical merits of a similar position in subsequent periods and therefore may allow recognition of a similar position pursuant to ASC 740-10-25-8(a). However, ASC 740-10-25-12 cautions that an uncertain tax position that is effectively settled pursuant to ASC 740-10-25-10 may not provide any basis for management to change its assessment of the technical merits of the same or a similar position taken in other periods. That is because the taxing authority may not have examined the uncertain tax position (and thus settlement may not provide any technical insight).
The resolution might also fail to provide any technical insight if it is the result of a negotiated settlement that involves many issues and so-called “horse-trading” unrelated to the technical merits of the resolved position. Management will need to assess whether new information came to light as a result of the resolution that could change their prior recognition conclusions. In making this determination, management should consider the level at which a resolution was reached, the substance of communication and discussion during the resolution process, and the materiality and importance of the position relative to the tax return.

15.5.3.4 Entities not subject to audit by a taxing authority

Because recognition and measurement cannot consider detection risk, an entity that is not subject to a taxing authority’s audit will not be able to recognize a tax benefit that did not meet the recognition and measurement criteria of ASC 740 until the statute of limitations expires or until subsequent changes in the technical merits of the tax position permit a change in judgment about the position’s sustainability.

15.5.4 Subsequent derecognition of uncertain tax positions

ASC 740-10-40-2 states that a previously recognized tax position should be derecognized in the first period in which the position no longer meets the more-likely-than-not recognition threshold. New information resulting in derecognition must be considered and accounted for even if that derecognition results in a deferred tax asset that would require a valuation allowance to be recorded against it.

15.5.5 Subsequent events related to uncertain tax positions

The approach to subsequent events in ASC 740-10-35-3 related to uncertain tax positions differs from the approach in ASC 855, Subsequent Events. Developments that occur after the balance sheet date but before issuance of financial statements (including the discovery of information that was not available as of the balance sheet date) should be recognized in the period in which they occur (i.e., the period subsequent to the period covered by the unissued financial statements). Only an explanatory disclosure of the event (if it is significant) would be appropriate in the prior period’s financial statements.

ASC 740-10-55-118

Entity A has evaluated a tax position at its most recent reporting date and has concluded that the position meets the more-likely-than-not recognition threshold. In evaluating the tax position for recognition, Entity A considered all relevant sources of tax law, including a court case in which the taxing authority has fully disallowed a similar tax position with an unrelated entity (Entity B). The taxing authority and Entity B are aggressively litigating the matter. Although Entity A was aware of that court case at the recent reporting date, management determined that the more-likely-than-not recognition threshold had been met. Subsequent to the reporting date, but prior to the issuance of the financial statements, the taxing authority prevailed in its litigation with Entity B, and Entity A concludes that it is no longer more-likely-than-not that it will sustain the position.

ASC 740-10-55-119

Paragraph 740-10-40-2 provides the guidance that an entity shall derecognize a previously recognized tax position in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination, and paragraphs 740-10-25-14; 740-10-35-2; and 740-10-40-2 establish that subsequent recognition, derecognition, and measurement shall be based on management’s best judgment given the facts, circumstances, and information available at the reporting date. Because the resolution of Entity B’s litigation with the taxing authority is the information that caused Entity A to change its judgment about the sustainability of the position and that information was not available at the reporting date, the change in judgment would be recognized in the first quarter of the current fiscal year.

Management will need to carefully assess whether events that impact the recognition or measurement conclusions are the result of new information or information that was available as of the balance sheet date. The requirement to regularly review the sustainability of all material positions and the measurement of associated tax benefits will require coordination between an entity’s tax and financial reporting personnel.

15.5.6 Changes in judgment related to uncertain tax positions

When new information causes a change in judgment about the recognition or measurement of an uncertain tax position (including any related interest and penalties) in a prior year, the effect should be recorded as a discrete item in the period in which the change occurs.
Changes in judgment related to uncertain tax positions taken in a prior interim period, but within the same fiscal year, are an integral part of an annual period, and should be accounted for in accordance with the principles of ASC 740-270-35. TX 16.3.4 includes a discussion about which tax effects are included as part of the consolidated annual effective tax rate and which ones are recorded based on year-to-date activity.
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