Most companies strive to legitimately reduce their overall tax burden and to reduce or delay cash outflows for taxes. Managements’ tax positions frequently are subjected to legal scrutiny before the uncertainty ultimately is resolved.

So, uncertainty exists because tax returns usually aren’t examined for one, two, or more years. If that uncertainty resolves unfavorably, the company could have to pay more tax than it originally recognized.

How should the potential for an unfavorable outcome to that uncertainty be shown in the financial statement?