Issue 1: Determine the adjustments required to the Company s preliminary 2007 financial statements to comply with ASC 740- 10 (Interpretation 48) by completing the table provided below, and jus

Issue 1:

Determine the adjustments required to the Company’s preliminary 2007 financial

statements to comply with ASC 740-

10 (Interpretation 48) by completing the

table provided below, and justify your position.

Over what periods should interest be

accrued in 2008 for financial reporting

purposes? Provide support for your conclusion

Issue 2:

Determine the adjustments required to the Company’s preliminary 2007 financial

statements to comply with ASC 740-

10 (Interpretation 48) by completing the

table provided below, and justify your position.

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Case 09-9
Bricks & Mortar
Bricks & Mortar Co. (the “Company”), an SEC registrant, is a manufacturer of
construction equipment.
The Company has been in business for more than 50 years,
operating profitably for the past 25.
In addition, it has an applicable tax rate of 40
percent and no unused tax loss or credit carryforwards.
The Company’s fiscal year ends
on December 31.
The Company adopted ASC 740-10,
Income Taxes: Overall
(
FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes),
as of January 1, 2007, and determined
at that time that it was not necessary to recognize any income tax liabilities (or other
adjustments) related to unrecognized tax benefits.
The last date of payment of fiscal year
2007 tax is March 17, 2008, for purposes of accruing interest and penalties under the tax
law.
The Company is preparing its financial statements for the year ended December 31, 2007.
In determining the amount of its 2007 tax provision, the Company has prepared a draft of
its 2007 tax return.
The Company’s tax working papers indicate that its preliminary tax balances, on an “as-
filed” basis (i.e., before ASC 740-10 (Interpretation 48) adjustments), are as follows:
Balance sheet accounts
Current tax liability
$2,000
[1]
Deferred tax liability
$
800
[2]
Income statement accounts
Current tax expense
$2,000
[3]
Deferred tax expense
$
200
[4]
[1]
Agrees to tax-owed line item in draft tax return
[2]
Relates to fixed asset temporary differences only (book basis of $100,000 and
tax basis of $98,000)
[3]
Agrees to tax provision rollforward
[4]
Agrees to deferred tax provision working papers
Management has identified two deductions, taken in its draft 2007 tax return, for which
the tax law is not clear as to whether those tax positions should reduce the Company’s
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Case 09-9: Bricks & Mortar
Page 2
2007 tax liability.
The Company is evaluating these tax positions under Interpretation 48
for financial reporting purposes.
Management is highly confident that all other tax
positions will be sustained by the taxing authority upon examination (recognition) and
that 100 percent of the deductions claimed in the tax return should be reflected in the
financial statements (measurement) because they are based on clear and unambiguous tax
law.
Refer to Appendix A for information about situations in which interest and penalties
could be assessed by the taxing authority.
For Issues 1 and 2, assume that each of the tax
positions has substantial authority for the purpose of determining whether penalties may
be assessed.
Issue 1 Facts:
As a result of implementing a certain tax strategy, the Company has included a $100
deduction in its draft tax return, resulting in a $40 reduction to taxes payable.
There is
uncertainty over whether the tax strategy is sustainable under the tax law and therefore
over whether the additional $100 is deductible for tax purposes.
Management asserts that there is a 40 percent chance that the tax position would be
sustained if taken to the court of last resort. However, on the basis of its past experience
in negotiating settlements with the taxing authority, management believes that if it were
to negotiate a settlement with the taxing authority rather than take the dispute to the court
of last resort, it would have an 80 percent cumulative probability of realizing at least $10
of benefit, (i.e., the Company believes it has a 10 percent chance of realizing $40 ($100 ×
40%), a 40 percent chance of realizing $20 ($50 × 40%), a 30 percent chance of realizing
$10 ($25 × 40%), and only a 20 percent chance of realizing no benefit).
The sustainability of this tax position does not affect the tax bases of the Company’s
assets or liabilities.
This tax position meets the substantial authority threshold for
determining whether penalties may be assessed.
Issue 1 Facts, One Year Later:
Assume the same facts as Issue 1 above, but it is one year later and the Company is
preparing its financial statements for the year ended December 31, 2008.
No facts or
circumstances relating to this tax position have changed between December 31, 2007, and
December 31, 2008, except for the passage of time.
Issue 2 Facts:
The Company has taken a tax deduction in its draft tax return in the amount of $100,
resulting in a $40 reduction to taxes payable.
Management has obtained a tax opinion
from a law firm at a 65 percent level of confidence that the tax position is appropriately
deductible under the tax law and concluded that the tax position meets the more-likely-
than-not recognition threshold.
Management asserts that it would negotiate a settlement
Copyright 2007 Deloitte Development LLC
All Rights Reserved.

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