Welcome back in this lesson we're going to look at step two of the taxes two step, we're going to look at measurements. So how do we measure? Once we've decided that we've met the recognition threshold. How do we measure the amount of the tax benefit that we're going to recognize? Well, once we've met that threshold of more likely than not I'm going to look at the individual considerations of the individual probabilities of amounts that I think are likely to be recognized. And then I'm going to take the largest amount that is greater than 50 percent likely of realization upon ultimate settlement. What does that mean? Let's look at an example and maybe you can see it. So Wuhan Inc has decided to take a deduction that creates an uncertain tax benefit. They determine the tax benefit of $100 is more likely than not of being sustained on examination and therefore it qualifies for recognition. They're going to get something is more likely than not how much should they recognize? What amount will be recognized in the financial statements is going to be determined by breaking down the individual probabilities and taking the largest amount that crosses the 50% threshold. So here's an example. We have possible estimated outcomes for wreck determining $100 we estimate there's only a 5% probability out actually get the full $100. My cumulative probability of occurrence therefore is $5. Again, the possible estimated outcome say at $80 being accepted. There's a 25% probability my cumulative probabilities now 30. The largest amount that's 50% more likely is going to come where I crossed the cumulative threshold. So when I get more than 50% likely being realized which is the third item at which point the cumulative probability is 55% I go across to the possible estimated outcome. It's $60. That's the largest amount that's more than 50% likely of being realized. That's the amount I'm going to put in the financial statements. 60 the largest amount that's more than 50% likely of being realized based upon cumulative probabilities. Notice that I'm not recognizing the full 100. I've said that it's more likely than not that I'm going to get something out of that $100 deduction and uncertain tax position, but the possibility of getting the full 100 is only 5%. If there was no amount that was more likely than not of being recognized. I would not meet the recognition criteria. I would not be more likely than not that I would be able to recognize an amount here. There's a 95% probability that I'll get something out of this and therefore, it's more likely than not that I'll have a benefit the largest amount. That's more likely than not though is only $60 based upon cumulative probabilities. As you can see this is highly subjective and requires the exercise of considerable judgment by both management and the auditor. So once I recognized an uncertain tax position, what about interest and penalties? Interest and penalties are going to be on the amounts that I haven't recognized, the amounts that are not more likely than not to being recognized but that I've taken in the return. So when the tax law requires interest to be paid on the underpayment of income taxes, you're going to start recognizing interest expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. What's that mean? That usually means you're going to start accruing taxes payable from the due date of the return. If the tax position is not likely to succeed you'll start accruing interest on the day the tax would be do. So the amount of interest expense to be recognized is computed by applying the statutory rate. Most taxing authorities will provide a statutory rate of interest and you're going to apply that to the difference between the tax position recognized the amount that was more likely than not. And the amount that you took on the tax return which is the uncertain tax position. So you're going to recognize interest on the uncertain amount not on the certain amount, the uncertain amount. Well what about penalties? Well, if it doesn't meet the statutory minimum threshold to avoid payment of penalties, then you would also accrue the penalties on there. Now that's a less likely situation that would have to be a fairly aggressive position. But if it's applicable you would also accrue penalties starting at the same period of which they would be due. So you would also recognize penalties if there's a change in judgment about meeting the minimum statutory threshold. So if there's a change in judgement in a future period you would start accruing penalties as of that point in time. So the second step in recognizing uncertain tax positions is measurement. Once I've determined that it's more likely than not that I'm going to recognize a tax benefit. I look at the largest amount that's more likely than not of being recognized. I'm essentially dividing my uncertain tax position into two components. A component that's more likely than not that I'll recognize and a portion that's not more likely than not of being recognized. And I will recognize interest and potentially penalties on the second portion. Thank you.