Article
When Tax Provision Challenges Arise, Flexibility Is Key
[The most powerful ASC 740 calculation software on the market, Bloomberg Tax Provision solves the technical and process issues involved in calculating your income tax provision.]
Though tax compliance requires a certain amount of rigidity to ensure adherence to rules and regulations, flexibility is still an essential buzzword in the tax technology space – particularly when it comes to the provision process. In fact, being too rigid in approach can create unnecessary risk for taxpayers.
The provision process is among the most scrutinized in most corporate tax departments, due to its visibility in financial statements. To avoid dealing with messes at a critical moment and under a tight deadline, tax professionals will want to manage risk ahead of time by being proactive rather than reactive.
Established processes need to be agile enough to adequately address changes in the underlying business or environment. This becomes especially critical as companies grow or change, whether as a result of changes in tax law or changes in the actual footprint of the business that require compliance with laws in new states or countries, for example.
On top of the stresses of evolving tax laws and business needs, those in the provision space often face a time crunch. Much of the work is done just weeks after year-end. It must be completed quickly and accurately, before facing scrutiny within the organization and from external financial auditors.
“Oftentimes, the tax department is forced to make trade-offs around where they’re going to spend their time on the provision,” said Adam Schrom, Bloomberg Tax product lead. “If you don’t have as much time because you have a manual process and you’re up against the clock to get it done, those trade-offs can lead to more risk in the calculations – risk that you’re getting them wrong or not doing enough to get them materially right.”
Tax Provision Challenges
Tax professionals face several challenges in the provision process: How do you apply the law appropriately? How do you apply the accounting standard ASC 740 appropriately? And how do you mechanically get it all done?
One of the most common issues from a mechanical perspective is consolidation. How do you consolidate different calculations from different jurisdictions or different legal entities both swiftly and accurately? One simple solution is implementing software to handle it, such as Bloomberg Tax Provision.
“Spreadsheets, though a very powerful tool, aren’t necessarily designed to do such work in an efficient, clean, repeatable, controlled manner,” said Nick Frank, Bloomberg Tax product lead. “Provision solutions can do that.”
When it comes to ASC 740, automation can mitigate concerns about accuracy and efficiency, and free up more time for complex or open-ended decision-making and assessments.
“These calculations have a very mathematical, logical structure to them. If you can automate that structure through implementing a software, it frees you up to focus on other decisions or analyses that require more brainpower and aren’t simply representing math in a spreadsheet,” Schrom said. “You can spend your time thinking about those things, making sure you’re uncovering risks, documenting those risks and addressing them.”
[For comprehensive news and analysis of the most important tax developments this year, download our 2022 Quarterly Outlook.]
Assessing and Improving Flexibility
As tax professionals evaluate the provision process in light of these challenges, a key question remains: how do you know if you are being flexible enough to handle the inevitable curveballs in the process? Start by anticipating potential changes.
If you acquired a new entity, how long would it take to incorporate that entity into your process? Two hours? Two days? If you had to figure out how to comply with laws in an additional state, how long would it take to integrate that into your calculations and feel comfortable that everything is calculated properly?
“If something gets raised late in the process – for whatever reason it just doesn’t get filtered to the top of the priority list, or just was missed somehow – that’s the spot where the pressure is on,” Frank said. “All eyes are on the tax department to turn that around, and as we all know, when we try to work fast, we often make mistakes.”
Once the initial assessment is complete – you have an idea of how long it will take to pivot when changes, small and significant, arise (recall that the Tax Cuts and Jobs Act of 2017 was signed only nine days before the end of the year, for example) – it’s time to consider whether you can reduce that time, as well as the risks associated with last-minute scrambling. Automation via a software solution can help.
“As many people are, tax professionals are often being asked to do more with less. Yet at the same time, the world is getting more complex,” said Frank. Companies are adding complexity via growth, while tax authorities simultaneously add more rules and compliance issues.
“The drive toward using tools to solve the different components of the tax experience is going to become more and more important,” Frank added, “Because we’re going to need to make sure that we are not wasting time on tasks that can be automated.”
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Reference Shelf
- Hub: ASC 740 Tools and Resources
- Topic: ASC 740 NOLs and Credits
- Article: Checklists for Simplifying the Tax Provision Process
- Case Study: Flexential Streamlines Tax Provision with Bloomberg Tax
- Topic: How to Calculate the ASC 740 Provision for Income Taxes
- Webinar: Spotlight on the Year-End Tax Provision – Simplifying the Process