For a Smoother Tax Provision Close, Evaluate Processes Today

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1 August 2017 For a Smoother Tax Provision Close, Evaluate Processes Today An article by Michael F. Stenftenagel, CPA, and Sheryl Vander Baan, CPA Audit / Tax / Advisory / Risk / Performance Smart decisions. Lasting value.

2 For a Smoother Tax Provision Close, Evaluate Processes Today Was your last income tax provision and financial reporting process as efficient and effective as possible? Did routine tasks take longer than necessary, stealing time from value-added analysis? The growing complexity of the income tax provision process means tax professionals are being asked to complete internal and external reporting deliverables with an unprecedented combination of speed and accuracy. At the same time, income tax provisions are scrutinized today more than ever before. While completing an exhaustive evaluation of the tax provision close process might sound daunting and does demand attention from all stakeholders affected by the analysis organizations that proactively undertake this exercise will benefit from continuous process improvements. 2 August 2017 Crowe Horwath LLP

3 Getting Started Tax professionals often struggle to find time to analyze and improve the tax close process while managing day-to-day responsibilities and busy schedules. However, the review process can start simply with a series of questions related to both tactical components such as gathering data and loading it into the system and big-picture issues. Doing so can help organizations to identify major pain points or roadblocks and improve the entire process. Gathering Data Many of the challenges organizations face when it comes to the tax provision process relate to gathering and inputting data. Tax professionals often must collect data from multiple sources within and outside the organization, and any delays can have a domino effect. Data from disparate sources may or may not be at the required level of detail and might thus need to be cleaned before it can be inputted into tax calculations. Questions to consider: Is the data needed from others being received in a timely fashion? Is the data received accurate and in a usable format? Or does it need significant cleanup before it can be used in tax calculations? Is the collection of state and foreign tax data standardized and seamlessly integrated into the provision process? Loading and Coordinating Data Once the data has been validated, it must be loaded into one or more calculation tools. Changes to the general ledger may or may not flow through to the tax provision tool and vice versa. Finally, multiple tools and files might be in use, and data and results from one tool may need to be manually inputted into another tool. Questions to consider: How long does it take to load necessary data into the provision calculation tool? Do late changes to the general ledger flow through the tax calculation and into tax reports easily, or does any general ledger change drive almost a complete reiteration of the tax close process? Is the journal entry required to record tax expense or benefit generated by a tax provision tool? Is it posted automatically to the general ledger? How is the journal entry updated for each financial statement revision? Are multiple tools or files used such that results from one tool must be manually inputted into another tool to complete the reporting process? Does the process allow sufficient time to analyze and review the data and related reports before the results are delivered to management? crowehorwath.com 3

4 For a Smoother Tax Provision Close, Evaluate Processes Today Big-Picture Issues Examining the overall process at a high level might highlight opportunities for greater efficiency. Questions to consider: Is each task required to prepare the tax provision at both year-end and interim periods broken down by hours and documented in the close process workflow? Do certain portions of the provision process, such as state or foreign calculations, take longer than desired to complete? What are the differences between the year-end and interim provision processes? Are there tasks that could be performed during the interim period process that would support the year-end close process, or are there interim period tasks that could be done differently to eliminate duplicate work at year-end? Does the organization have a process in place to proactively consider impacts to the tax close process from larger organizational shifts such as mergers and acquisitions or software changes? Addressing these questions, as well as any others that are particular to an organization s specific fact pattern and industry requirements, can jump-start the documentation and review process necessary for implementing improvements to the tax close process. 4 August 2017 Crowe Horwath LLP

5 Common Areas for Improvement While the specific areas for improvement for any organization will depend on the pain points as identified through the previous questions, many organizations can benefit from taking the time to study process workflow, automate data migration, assess software solutions, integrate provision and compliance software, and consider deliverables. Reviewing each of these areas can result in process improvements that save time and yield more accurate results. Examine Process Workflow As described earlier, the tax provision processes should be studied to identify bottlenecks, ideally using a workflow tool. Involving all stakeholders in this exercise is important not only to gain buy-in, but also to confirm outputs are valid and necessary. Formally analyzing and documenting the provision process is also important as doing so allows others to pick up the ball if any person involved in the work becomes unavailable. Automate Data Migration Data migration processes should be automated when possible to mitigate risk and increase accuracy. However, automated processes require clean data, so data may need to be updated for consistency and reliability. Use the trial balance for the data load into provision software solutions to take advantage of automation features for tax adjustments. Use ancillary tools that are built into provision software solutions as well as spreadsheet software add-in features for additional automation. Data formats must be consistent in order for data migration to be reliable. Macros can be used for formatting, diagnostics, and other functions to facilitate the accuracy and reliability of the source data. Identify all manual adjustments or entries made within the calculation tools and determine if any of these can be automatically computed. Determine and document how effectively the trial balance and other source documentation is being used. Identify items that should be considered for improving calculations and the overall process. Enable automatic generation of the adjusting journal entry within the tool, and consider if it could automatically be posted into the general ledger. crowehorwath.com 5

6 For a Smoother Tax Provision Close, Evaluate Processes Today Assess Software Solutions Organizations that rely on multipurpose spreadsheet software for the tax provision close process should consider whether commercially available provision software solutions could improve speed and mitigate risk. The benefits of commercial software solutions can be seen clearly when it comes to deferred tax worksheets and tax payable rollforwards. Provision software solutions have the ability to provide for very detailed deferred tax worksheets and tax payable rollforwards. These can be updated easily, adjusted for organizational changes, and rolled forward into the next cycle, often automatically producing a provision-toreturn report. In contrast, for spreadsheet software model users, adding entities and rolling deferred tax balances forward into the next cycle often is a manually intensive process and can be a cumbersome task, subjecting the workbook to errors and possible corruption. Integrate Provision and Compliance Software Organizations should use the provision data as the starting point for income tax compliance reporting obligations, and ideally, integrate the software solutions used for provision and compliance. Integrating provision and compliance software solutions is a best practice that can deliver immediate results, including reductions in data entry risk, preparation time, and review time. At a minimum, organizations should: Review the integration process to determine how much of the provision output is being used to complete the compliance requirements. Identify the provision calculations and detail that are not being used for compliance purposes, and adjust as necessary so that they can be used for both purposes. Doing so will eliminate duplication of effort. Consider Deliverables Organizations should determine whether the current provision solution provides internal and external stakeholders with the outputs needed for applicable reporting requirements. If not, and if manual manipulation of data is required in order to produce the required reports, organizations can likely save time and improve their reporting accuracy by automating the generation of reports upon completion of the tax provision. 6 August 2017 Crowe Horwath LLP

7 Implementing Change Before the Year-End Financial Close Any large-scale organizational change efforts should be carefully planned around company and tax-department events and adequate time must be allowed for testing of the results and related controls. The time to improve your year-end or interim income tax close process is now. Organizations should invest time today to proactively surface challenges and develop a road map for achieving process improvements. crowehorwath.com 7

8 Learn More Michael Stenftenagel II Managing Director, Tax Services Sheryl Vander Baan Partner, Tax Services crowehorwath.com In accordance with applicable professional standards, some firm services may not be available to attest clients. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction Crowe Horwath LLP, an independent member of Crowe Horwath International crowehorwath.com/disclosure TAX A