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SEC Gives Funds More Time To Implement FIN 48

The SEC is giving the mutual fund industry additional time to comply with FASB Interpretation 48 regarding the accounting for uncertainty in income taxes. In response to a request for a delay by the Investment Company Institute, SEC Chief Accountant Conrad Hewitt agreed that operating companies otherwise would have more time to comply with FIN 48 than funds with fiscal years ending December 15, 2006. ICI pointed out that operating companies had until March 31, 2007 to recognize their tax liabilities under FIN 48, while certain funds would have to comply as early as January 2, 2007 since they calculate their net asset values ("NAVs") per share much more frequently than operating companies prepare their financial statements for periodic reports.

ICI requested a delay until supplemental guidance could be provided by either FASB or the SEC. FIN 48 raises unique issues for the fund industry, according to ICI. ICI described three scenarios in which a literal application of FIN 48 could require funds to inappropriately reduce their NAV. The Internal Revenue Service has addressed fund industry issues by providing guidance that is prospective only, ICI explained. FIN 48 would not allow funds to consider such less formal guidance and administrative practices when determining whether a position satisfies the "more-likely-than-not" standard. Tax benefits under FIN 48 may only be recognized when a position is more likely than not to prevail based upon specified authorities and, in limited circumstances, administrative practices and precedents, according to ICI.

Another problem area relates to issues for which tax is paid by another party. Before the application of FIN 48, funds did not recognize tax liabilities until the payment of tax was both probable and estimable. The third area relates to tax positions taken in fiscal years beginning before December 16, 2006. ICI said that funds which had filed tax returns for prior years under the "substantial authority" standard would have to reduce their NAVs on the first business day that FIN 48 applies if those positions do not satisfy the more-likely-than-not standard. The harm will fall directly on shareholders, ICI added.

Hewitt advised that the provisions of FIN 48 both permit and necessitate the consideration of informal IRS guidance. The SEC does not believe that FIN 48 puts any limits on the types of evidence that an enterprise can look to in making its determination of the technical merits of a tax position, he wrote. The interpretation lists certain available forms of evidence, but Hewitt said it should not be viewed as the totality of evidence that may be considered. Less formal guidance should also be considered, including administrative practices and precedents of the taxing authority.

Hewitt said the staff believes that FASB considered all of the issues raised in ICI's letter before it completed FIN 48. In discussions with the fund industry, the staff has advised that FIN 48 should not be read to limit the types or forms of evidence that may be considered, he added.

However, in light of the unique issues that the application of FIN 48 presents for funds, the staff would not object if a fund implements the interpretation in its NAV calculation as late as its last NAV calculation in the first required financial statement reporting period for its fiscal year beginning after December 15, 2006. A calendar year open-end or closed-end fund may implement FIN 48 no later than its June 29, 2007 NAV. The effects of the interpretation would be reflected in the fund's semi-annual financial statements contained in its Form N-CSR.

A fund with a fiscal year ending at the end of February would implement FIN 48 no later than its August 31, 2007 financial statements and calculation of NAV. Business development companies would implement the interpretation no later than the last day of the first reporting period beginning after December 15, 2006. A unit investment trust would implement it no later than December 31, 2007, which is the date of the information contained in its next report on Form N-SAR for fiscal years beginning after December 15, 2006.

Hewitt said the staff expects funds to make good use of the additional time to assess all of the issues related to the implementation of FIN 48.