Question

Briefly describe the two step process a company must undertake when it evaluates whether it can record the tax benefit from an uncertain tax position under ASC 740

Answer 1

The two-step process a company must undertake when evaluating the tax benefit from an uncertain tax position involves recognition and measurement of the benefit.

Step-by-step explanation:

The two-step process a company must undertake when evaluating whether it can record the tax benefit from an uncertain tax position under ASC 740 involves:

1. Recognition: The company first considers if it is more likely than not that the tax position will be sustained upon examination by tax authorities. If it is more likely than not, the company can recognize the benefit in its financial statements. If it is not more likely than not, the company proceeds to the next step.
2. Measurement: The company then determines the amount of benefit to recognize based on the tax position's probability of being sustained. It should recognize the largest amount of benefit that has a greater than 50% likelihood of being realized.

For example, if a company takes an aggressive tax position and it is not more likely than not to be sustained, the company would not record a tax benefit. However, if the tax position is more likely than not to be sustained, the company would record a tax benefit based on the probability of its realization.