Bricks and Mortar Case Study

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Bricks and Mortar
ASC 740 is an accounting subtopic known as accounting for income taxes. In this example from Deloitte a company named Bricks and Mortar have a few uncertain tax positions that need clarifying. Before starting in the issues with Bricks and Mortar, it is important to know the process of ASC 740 or more specifically FIN 48. According to Deloitte’s interpretation of ASC 740 in section 4-5, FIN 48 is a two-step process. The first step is recognition and recognition being more likely than not (more than 50%) the position will be sustained upon examination including appeals to the “court of last resort.” It is based on the technical merits of the position and presumed that taxing authorities have full knowledge of the situation. Step two is measurement of the uncertain tax position. Measurement includes determining the largest amount of tax benefit greater than 50% likely to be realized upon settlement. It is based on the settlement with taxing authority and that authority has access to all the facts. It can also be based on management’s best judgment of the situation.

Now that we have an understanding of the process of FIN 48 we can look at the issues of Bricks and Mortar. Issue 1 is pretty simple in nature, it does not meet the more likely than not assumption of step 1 and therefore there is no FIN 48 issue. It talks about the court of last resort, but management would have to feel greater than 50% for them to recognize the tax position.

Issue 2 does pass the first step of FIN 48 and gained a 65% assurance from a law firm. The next step is measuring the uncertain tax position. For this issue we must find the largest amount greater than 50% likely to be realized upon settlement. In issue 2 the entity takes a $100 tax deduction which reduces its current tax liability by $40. Although the tax position meets the more likely than not recognition threshold, the entity believes it would negotiate a settlement if the tax position were challenged by...
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