Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Disclosure of open tax years is now only required for a nonpublic entity that has material unrecognized tax benefits

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Disclosing which fiscal years are open to audit by tax authorities has been required for nonpublic companies for several years. An explicit requirement came into play with Technical Practice Aid 5250.15.

Effective March 2015 that TPA was deleted. The requirement now is based on a comment buried in the Basis for Conclusions of ASU 2009-06, which says disclosure of open tax years is only needed when there are material unrecognized tax benefits.

Impact of TPA 5250.15

That requirement has produced a standard comment on all nonpublic entity financial statements that looks something like this:

The entity files income tax returns with the U. S. and (state) governments. With few exceptions, the entity is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 20×1.

The AICPA has deleted TPA 5250.15. That type of comment will not be required unless the entity has material unrecognized tax benefits.

What changed?

The Center for Plain English Accounting (CPEA) inside the AICPA pointed out the position outlined in the TPA was in conflict with the fine details in ASU 09-06.

After considering the comments from CPEA, the AICPA pulled 5250.15.

More on the CPEA comments at the end of this post.

Why has this deep-in-the-weeds accounting issue been getting attention?

You might think that it’s only those weird technicians interested in something this detailed.

No so.  This has come to the attention of CPAs who were not already aware of it during their peer review.

It becomes a conversation issue, which gets documented in a Finding for Further Consideration (FFC), which requires a written reply on the FFC. Further, in the next peer review, the reviewer is obligated to followup on the FFC.

Reviewers are obligated to raise this issue. Why? That disclosure is specifically identified as something to look for on a peer review. See question FD107 on 22300 Financial Reporting and Disclosure Checklist. (That’s the form completed by your reviewer for every engagement which guides consideration of disclosures.)  A ‘no’ answer generates an MFC.

In California, it is the considered opinion of the Peer Review Committee that failure to disclose open tax years is an FFC.

Transition

If you are into the fine details, you may want to think through the date to stop making the disclosure (presuming there are no material unrecognized tax benefits).

On one hand, the TPA was removed in March, which would suggest financial statements after that date need not include the comment.

On the other hand, if you understand and agree with the comments by CPEA, you might conclude that 5250.15 was inconsistent with ASU 09-06 when issued.  Thus 5250.15 was incorrect itself and thus isn’t now and wasn’t then a technically valid requirement since it conflicted with the ASC. If you take that position, you would argue that 5250.15 has never applied since it is in conflict with an ASU. Thus, you could ask your clients to drop the comment on all unissued financial statements.

On the other, other hand, if you want to avoid any risk of a technical argument over minute trivia with your peer reviewer, you might wait until the peer review forms are revised again before you drop those comments.

If you have read this far in the post and are actually interested, you are quite able to develop your own conclusion.

I have a preliminary idea, but as I write this post, I am not sure what my position will be.

Technical details

The CPEA has a page on the AICPA website that gives the technical discussion:  CPEA Report Results in Elimination of the Disclosure of Open Tax Years When No Unrecognized Tax Benefits Exist.

I will quote most of the first two paragraphs:

… Technical Practice Aid (TPA or TIS) 5250.15, which required an entity to disclose a description of tax years that remain subject to examination regardless of whether an entity has any uncertain tax positions (i.e., unrecognized tax benefits), has been deleted.  …  Consequently, {after considering CPEA’s paper,} members of the FASB and Private Company Council (PCC) said that the guidance in TPA 5250.15, Application of Certain FASB Interpretation No. 48 (codified in FASB ASC 740-10) Disclosure Requirements to Nonpublic Entities That Do Not Have Uncertain Tax Positions, should change and that disclosures of open tax years are necessary only if an entity has unrecognized tax benefits.  The March update for AICPA Technical Questions and Answers, which contain TPAs, has deleted TPA 5250.15.

The key sentence there is:

…disclosures of open tax years are necessary only if an entity has unrecognized tax benefits.

The Recently Issued Technical Questions and Answers page shows 5250.15 deleted in March 2015. That appears to be a dynamic page so that info will roll off sometime in the future.

On to the second paragraph for the technical analysis:

FASB Accounting Standards Update (ASU) 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, was released in 2009. It amended FASB Accounting Standards Codification (FASB ASC) 740, Income Taxes, and retained the disclosure requirement in FASB ASC 740-10-50-15(e), which requires a description of tax years that remain subject to examination. In our recent report, we note that Paragraphs BC 13-14 in the Basis for Conclusions of ASU 2009-06 are sufficiently clear that entities without material unrecognized tax benefits are not required to disclose tax years open to examination. TPA 5250.15 was in conflict with paragraphs BC 13-14. With the elimination of the TPA, the requirement to disclose a description of tax years that remain subject to examination is clarified to be necessary only when an entity has material unrecognized tax benefits.

The third paragraph notes it will take time for this change to work its way into the peer review checklists.

Also there is a comment that the change may render moot the need to follow-up on prior FFCs for not disclosing open tax years. That makes sense – if the accounting requirement no longer exists, there would not be a need to follow-up on the issue identified three years earlier.

Thanks to Charles Hall for calling my attention to this issue: AICPA Changes Requirement to Disclose Open Tax Years. Have I mentioned lately that if you are looking at my blog, you should really follow his blog too?

Written by Jim Ulvog

June 26, 2015, 9:49 am at 9:49 am

Posted in Accounting

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