4.3 Measurement

ASC 740-10

30-7 A tax position that meets the more-likely-than-not recognition threshold shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more-likely-than-not recognition threshold shall consider the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances, and information available at the reporting date. As used in this Subtopic, the term reporting date refers to the date of the entity’s most recent statement of financial position. For further explanation and illustration, see Examples 5 through 10 (paragraphs 740-10-55-99 through 55-116).

4.3.1 Information Affecting Measurement of Tax Positions

In determining the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with a tax authority, an entity should give more weight to information that is objectively verifiable than to information that is not. The amount of tax benefit to recognize in financial statements should be based on reasonable and supportable assumptions. Some information used to determine the amount of tax benefit to be recognized in financial statements (amounts and probabilities of the outcomes that could be realized upon ultimate settlement) will be objectively determined, while other amounts will be determined more subjectively. The weight given to the information should be commensurate with the extent to which the information can be objectively verified. Examples of objectively determined information include the amount of deduction reported in an entity’s as-filed tax return or the amount of deduction for a similar tax position examined by, or sustained in settlement with, the tax authority in the past.

ASC 740-10-30-7 states, in part:

Measurement of a tax position . . . shall consider the amounts and probabilities of the outcomes that could be realized upon [ultimate] settlement using the facts, circumstances, and information available at the reporting date.

Because of the level of uncertainty associated with a tax position, unless the position is considered “binary” (see additional discussion in Section 4.3.5), an entity will generally need to perform a cumulative-probability assessment of the possible estimated outcomes when applying the measurement criterion.

Because ASC 740 does not prescribe how to assign or analyze the probabilities of individual outcomes of a recognized tax position, this process involves judgment. Ultimately, an entity must consider all available information about the tax position to form a reasonable, supportable basis for its assigned probabilities. Factors an entity should consider in forming the basis for its assigned probabilities include, but are not limited to, the amount reflected (or expected to be reflected) in the tax return, the entity’s past experience with similar tax positions, information obtained during the examination process, closing and other agreements, and the advice of experts. The entity should maintain the necessary documentation to support its assigned probabilities.

In any of the following circumstances, an entity may need to obtain third-party expertise to assist with measurement:

The tax position results in a large tax benefit.
The tax position relies on an interpretation of law in which the entity lacks expertise.
The tax position arises in connection with an unusual, nonrecurring transaction or event.
The range of potential sustainable benefits is widely dispersed.
The tax position is not addressed specifically in the tax law and requires significant judgment and interpretation.

4.3.2 Cumulative-Probability Table

It is expected that an entity will perform a cumulative-probability analysis when measuring its uncertain tax positions that have met the recognition threshold in instances in which there is more than one possible settlement outcome. Although the use of a cumulative-probability table in the performance of such an analysis is not required, it is a tool that can help management (1) assess and document the level of uncertainty related to the outcomes of various tax positions and (2) demonstrate that the amount of tax benefit recognized is consist with the guidance in ASC 740-10-30-7.

4.3.3 Cumulative-Probability Approach Versus Best Estimate

In the determination of the amount of tax benefit that will ultimately be realized upon settlement with the tax authority, cumulative probability is not equivalent to best estimate. While the best estimate is the single expected outcome that is more probable than all other possible outcomes, the cumulative-probability approach is based on the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a tax authority.

The table in the example below illustrates this difference by showing the measurement of the benefit of an uncertain tax position. Under the cumulative-probability approach, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized is $20, while the best estimate is $25 (the most probable outcome at 31 percent). An entity must use the cumulative-probability approach when measuring the amount of tax benefit to record under ASC 740-10-30-7.

Example 4-1

In its 20X7 tax return, an entity takes a $100 tax deduction, which reduces its current tax liability by $25. The entity concludes that there is a greater than 50 percent chance that, if the tax authority were to examine the tax position, it would be sustained as filed. Accordingly, the tax deduction meets the more-likely-than-not recognition threshold.

Although the tax position meets the more-likely-than-not recognition threshold, the entity believes that it would negotiate a settlement if the tax position were challenged by the tax authority. On the basis of these assumptions, the entity determines the following possible outcomes and probabilities:

Accordingly, the entity should (1) recognize a tax benefit of $20 because this is the largest benefit that has a cumulative probability of greater than 50 percent and (2) record a $5 liability for UTBs (provided that the tax position does not affect a DTA or DTL).

4.3.4 Use of Aggregation and Offsetting in Measuring a Tax Position

An entity may not employ aggregation or offsetting techniques that specifically apply to multiple tax positions when measuring the benefit associated with a tax position. Each tax position must be considered and measured independently, regardless of whether the related benefit is expected to be negotiated with the tax authority as part of a broader settlement involving multiple tax positions.

4.3.5 Tax Positions That Are Considered Binary

A tax position is considered binary when there are only two possible outcomes (e.g., full deduction or 100 percent disallowance).

Because tax authorities are often permitted — in lieu of litigation — to negotiate a settlement with taxpayers for positions taken in their income tax returns, very few tax positions are, in practice, binary. In certain circumstances, however, it may be acceptable to evaluate the amount of benefit to recognize as if the position was binary (e.g., when the tax position is so fundamental to the operation of an entity’s business that the entity is unwilling to compromise). Since such circumstances are expected to be rare, the entity should use caution in determining whether a tax position should be considered binary with respect to measuring the amount of tax benefit to recognize.

If a tax position is considered binary and meets the more-likely-than-not threshold for recognition, it is appropriate to consider only two possible outcomes for measurement purposes: the position is sustained or the position is lost. ASC 740-10-30-7 states, in part:

A tax position that meets the more-likely-than-not recognition threshold shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more-likely-than-not recognition threshold shall consider the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances, and information available at the reporting date.

While such situations are rare, when a tax position is considered binary and meets the more-likely-than-not recognition threshold in ASC 740-10-30-7, that tax position should be measured at the largest amount that is more than 50 percent likely to be realized, which would generally be the as-filed position (i.e., full benefit).

Connecting the Dots

When a full tax benefit is recognized for a tax position that is considered binary and no UTB is presented in the tabular UTB reconciliation, the entity should consider disclosing additional information for such tax positions that could have a significant effect on the entity’s financial position, operations, or cash flows.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.