My Not-for-Profit Organization doesn’t pay taxes, is this standard applicable to me?

Yes. The standard is applicable to all material income tax positions. The standard defines a tax position as a position taken in a previously filed tax return or a position expected to be taken in a future return. Not-for-Profit Organizations assert a critical tax position when they file their Form 990 indicating that they are "tax exempt". Additionally, since Not-for-Profit Organizations pay taxes on their unrelated business income they make judgments in determining unrelated revenue streams as well as taxes due.

Where do I start?

First step is to identify all tax positions taken by the organization. Remember this is an ongoing process it is not one- time identification. An organization should identify tax positions in jurisdictions in which it files a return or would be subject to income taxes. For example, if an organization has nexus in a jurisdiction in which it has income, then the organization has to consider whether a tax return should have been filed in that jurisdiction. This applies to the determination of unrelated business income subject to income tax.

The standard also addresses a few specific questions that should be pointed out. The first relates to whether income is attributable to an organization or its owners, as in the cases with partnerships and S-corporations. The standard reiterates: if income taxes are attributed to the entity then those taxes are classified as income taxes; if income taxes are attributed to owners, those taxes are not considered income taxes of the entity and not subject to this new standard. The second relates to consolidated or combined groups. Entities within a consolidated or combined group should consider tax positions of all entities within the group regardless of the tax status of the reporting entity.

Unit of account

The organization should establish a unit of account for tax positions. Essentially, this encompasses how tax positions are grouped. The unit of account for any given tax position is a judgment made by the organization and should consider the manner in which the organization prepares and supports its income tax return, and the approach the organization anticipates the tax authorities will take during an examination. Once a unit of account is established, it should be consistently applied to similar positions unless there is a change in facts and circumstances which indicate that a different unit of account is more appropriate than the one previously used. It is worth noting that there is a possibility that multiple organizations evaluating the same tax positions could conclude on different units of account.

The Two-Step Process: Recognition and Measurement

After tax positions have been identified (and grouped by unit of account) they are subject to what is being called the two-step process.

Recognition

The first step is determining whether a tax position has met the recognition threshold. The FASB’s threshold is "more likely than not", which represents a likelihood greater than 50% that a tax position would be up held by a taxing authority. All organizations must at least perform step 1 for all tax positions. The FASB inserts a presumption that all tax positions will be examined by a taxing authority (this means the "it’s never happened before" argument exist no longer). If management determines that it is more likely than not that 100% of a tax position would be sustained by a taxing authority then the organization has a highly certain tax position. Highly certain tax positions must be based on clear and unambiguous tax law; stand on its own merits and be documented by the organization. If management determines that it is more likely than not that a tax position will not be sustained by a taxing authority then the organization moves on to the measurement step. It is worth noting that if timing is the only uncertainty (i.e. depreciation and/or amortization) an organization can skip the recognition step and go directly to measurement.

Measurement

The measurement of a tax position represents management’s best judgment of the amount the organization would accept in a settlement with a taxing authority.

Changes in Judgment

Since the identification and evaluation of tax positions is an on- going process there could be instances in which there is a change in facts and circumstances and even laws that would cause an organization to have a change in judgments made related to tax positions. However, changes in judgment must arise from the change in facts and circumstances and not the re-evaluation of information that was available at the time the original judgment was made. An organization would recognize a previously unrecognized tax position in the first period the more likely than not threshold is met, the statue of limitations has expired (i.e. a taxing authority can no longer challenge a position) or when a tax position is settled through examination, negotiation or litigation. An organization would derecognize a previously recognized tax position in the first period that the more likely than not threshold is not met. Any changes in measurement as a result of changes in judgment should be reflected in the period in which the change occurs.

Adoption

The cumulative effect of the adoption of this standard is reported as an adjustment to the opening unrestricted net asset balance.

Disclosures

Required for Nonpublic Companies

The latest release of this accounting standard amended the disclosure requirements for nonpublic organizations. As a result nonpublic organizations are required to disclose the following: interest and penalty classification policy, this relates to whether the organization’s policy is to classify interest and penalties as operating expense or income tax expense, both are acceptable: the amount of interest and penalties for the periods presented, description of the tax years subject to examination by major jurisdictions, these would include any years that have not passed the statue of limitations; additionally, nonpublic companies have to do a 12 month look forward (12 months forward from the reporting date) and make a determination as to the possibility of changes and disclose the nature of uncertainty, nature of the event that would cause a change, and an estimate of the range of the reasonably possible change or a statement that an estimate cannot be made.

Not Required for Nonpublic Companies

The guidance for applying the standard to nonpublic companies eliminated the requirement for disclosing a tabular presentation and the amount of unrecognized tax benefit that, if recognized would impact the effective tax rate.

Definition of a Public Company

It is important to note that the accounting standard definition of a public company includes a nonpublic company that is consolidated with a public company for reporting purposes. Therefore a Not-for-Profit organization that has a public company parent company and is consolidated with the parent company would be considered a public company in applying this standard.

Sources: ASC 740-10 Accounting for Uncertainty in Income Taxes ASU 2009-06