APPLICATION GUIDANCE FOR PASS-THROUGH ENTITIES AND TAX-EXEMPT NOT-FOR-PROFIT ENTITIES AND DISCLOSURE MODIFICATIONS FOR NONPUBLIC ENTITIES COMMENT LETTER SUMMARY 1.

The comment period for the proposed FSP began on May 1, 2009, and ended on June 17, 2009. As of July 6, 2009, the Board received 14 comment letters, which are summarized below.

RESPONDENT PROFILE Respondent Type Big 4 Accounting Firms Other Accounting Firms

Number of Respondents 4 4

State Societies AICPA Trade Associations Advisory Groups Total

3 1 1 1 14

Percentage

29% 29% 21% 7% 7% 7% 100%

SIGNIFICANT ISSUES 2.

All of the respondents indicted general support for the proposed FSP and believe it would improve the application of FASB No. Interpretation 48, Accounting for Uncertainty in Income Taxes.

3.

Although there was overall general support for the proposed FSP, there were comments on some of the guidance. The comments have been grouped into the following categories: (a)

Definition of an income tax

(b)

Interaction of the proposed FSP with other income tax guidance

(c)

Disclosures

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(i)

Total unrecognized tax benefits

(ii)

Elimination of disclosures other than paragraphs 21(a) and 21(b) of Interpretation 48 for nonpublic entities

(iii) Disclosure if Interpretation 48 results in no liability recognition (d)

Editorial suggestions (i)

Paragraph 26(a) relating to the use of tax credits in the examples

(ii)

Minor changes to the wording that do not impact the meaning or intent of the proposed FSP

(e)

Effective date and transition

(f)

Scope (i)

Public tax-exempt not-for-profit entities

(ii)

Private company exemption from Interpretation 48

(iii) Expand scope to include all entities, not just pass-through and tax-exempt not-for-profit entities.

Definition of an Income Tax 4.

Several respondents suggested that the Board add a project to its agenda to develop the definition of an income tax. The Board decided at the April 15, 2009 meeting that the issue of when a tax is an income tax is outside of scope of the proposed FSP. Comment letters indicated general agreement with that decision but suggested that there is diversity in practice about whether or not a tax is an income tax. One respondent cited EITF Issue No. 91-8, “Application of FASB Statement No. 96 to a State Tax Based on the Greater of a Franchise Tax or an Income Tax,” which provided specific guidance about whether a specific tax was or was not an income tax.

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Interaction of the Proposed FSP with Other Income Tax Guidance 5.

One comment letter (CL# 4) suggested modifying the proposed FSP to provide guidance relating to the interaction of the proposed FSP with other guidance such as EITF Issue No. 95-9, “Accounting for Tax Effects of Dividends in France in Accordance with FASB Statement No. 109.”

6.

The issue addressed in Issue 95-9 is whether a tax that is assessed on a corporation based on dividends distributed to shareholders should be recorded as an increase in income tax expense or considered to be in effect a withholding of tax for the recipient of the dividend and recorded in equity as part of the dividend paid to shareholders. The consensus indicates that if two conditions are met, the tax based on the dividends distributed should be recorded as a transaction with owners. A respondent stated that “although those conditions in the EITF consensus are more specific than the provisions of the proposed FSP, we believe the conditions are appropriate considerations in determining whether a tax based on dividends distributed is attributable to the entity or its owners under the provisions of the tax law and regulations.”(CL#4)

Disclosures Total Unrecognized Tax Benefits

7.

Several respondents commented that if the disclosure requirements of paragraph 21(a) of Interpretation 48 are eliminated for non-public entities, the proposed FSP should require the disclosure of the total unrecognized tax benefits at the balance sheet dates (CL#4, CL#6, CL#9, and CL#10). They believe that without that information, the required disclosures of paragraph 21 would not be relevant because they are related to the total unrecognized tax benefits. One respondent (CL#6) suggested either requiring a disclosure of the total unrecognized tax benefits or, if that is not disclosed, eliminating the disclosures required by paragraphs 21(c), 21(d), and 21(e). They reasoned that the information required in

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paragraphs 21(c), 21(d), and 21(e) is not relevant without the disclosure of the total unrecognized tax benefits. 8.

One respondent (CL#14) indicated that the total unrecognized tax benefits would not be useful to users of private company financial statements because “information about the total amount of unrecognized tax benefits is not actionable to those users.”

Elimination of disclosures other than paragraphs 21(a) and 21(b) of Interpretation 48 for nonpublic entities

9.

One constituent (CL#1) suggested that paragraph 21(e) be eliminated from disclosures required by all entities. He believes the information required by that paragraph, a description of tax years that remain subject to examination by major jurisdictions, is not relevant to users of private company financial statements. The respondent indicated that the information would dilute and obscure more meaningful information within the notes.

10.

Another respondent (CL#6) suggested the possibility of excluding the disclosures required by paragraphs 21(c), 21(d), and 21(e) because they believe that that information would not be relevant without the disclosure of the total unrecognized tax benefit. See paragraph 7.

Disclosures If There Are No Interpretation 48 Liabilities

11.

One constituent (CL#5) asked if a disclosure would be required if management determines that there are no unrecognized tax benefits to record.

Editorial Changes 12.

One comment letter (CL#6) expressed concern that there would be unintended consequences if the examples referenced “credits” in paragraph 26(a). They indicated that the term “credits” has a broader meaning than as used in the proposed FSP and would create confusion in applying the concepts in the example.

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They recommended changing the term “non-refundable credit” to “payment against the tax liability of the owners.” 13.

Several comment letters recommended minor wording modifications to the proposed FSP.

Scope Public Tax-Exempt Not-for-Profit Entities

14.

Several comment letters (CL#7 and CL#11) suggested that the scope of Interpretation 48 exclude public tax-exempt not-for-profit entities from its scope. They referred to tax-exempt not-for-profit entities that were deemed “public” because of conduit debt as defined in FSP FAS 126-1, Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities. One respondent indicated that the requirements of Interpretation 48 would be “overwhelming” because many public tax exempt not-for-profit entities are small with fewer resources to generate the information without incurring significant cost.

Private Company Exemption from Interpretation 48

15.

One respondent (CL#11) indicated overall support for the proposed FSP but indicated that they believe that a Statement 5 approach to evaluating uncertain tax positions is a better alternative than Interpretation 48. The respondent also indicated that the cumulative probability determination of the liability for unrecognized tax benefits will be a burdensome requirement for most nonpublic enterprises. They believe that nonpublic entities would have to engage outside experts to comply with the requirements of Interpretation 48 in order for the entity’s auditor to remain independent.

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Expand Scope to Include All Entities, Not Just Pass-Through and Tax Exempt Not-for-Profit Entities

16.

One comment letter (CL#6) suggested modifying the scope to indicate that the proposed FSP applies to all entities, not just pass-through entities and tax-exempt notfor-profit entities. They stated “While the issues addressed in the proposed FSP may arise more frequently for pass-through entities and not-for-profit entities, many of the same concepts would be applicable to other types of entities. For example, there are instances where a for-profit entity might withhold and remit taxes on behalf of a shareholder.” They suggested that the Board, if it does not expand the scope to all entities, should modify the scope to include tax-exempt entities, pass-through entities, and entities that function in a manner similar to pass-through entities.

Effective Date 17.

One comment letter (CL#6) recommended that the proposed FSP become effective for periods ending after September 15, 2009 rather than upon issuance to allow entities the time needed to appropriately consider and apply the guidance.

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