Accounting for Income Taxes

1. Discuss the two-step process for recognizing and measuring tax benefit of uncertain tax position. Under the FASB interpretation no.48 (FIN 48) accounting for uncertainty in income taxes, there is a clear threshold set for the purpose of recognizing the benefits of tax positions in the financial statements of companies. The more likely than not tax position should be sustained by appropriate taxing authority. It therefore sets out a two-step process for recognizing and measuring tax benefits in the event of uncertain tax position. The first step involves recognition in which the firm ascertains whether it is more likely than not that a firm would sustain a tax position when examined. This first step also involves verification and resolution of any form of litigations or even appeals that may based on the technical merits of the tax position. In this step the tax position should be evaluated to verify whether it has met the more likely than not threshold (Schroeder et al., 2011). The second step involves measurement in which the tax position that met the threshold of more-likely-than not recognition is measured so as to determine the amount that should be recognized in the financial statement. In this case, the tax position should be measured at the greatest amount of benefit that is higher than 50%.