Is tax provision work an exact science?
“A tax provision is an estimate of tax
and not an exact science, but it seems to be moving more toward an exact science
in an area that’s almost impossible to fully
predict,” says David Sordello, CPA, tax
partner, Armanino McKenna LLP. “Meanwhile, companies are struggling with these
provisions in a tax world that continues to
grow more complex as business becomes
more global.”
Smart Business spoke with Sordello
about how the new complexities of tax
provision work are placing a burden on
companies and prompting big changes in
their tax departments.
How can the new tax environment ensnare
companies?
Two big areas are causing problems.
First, as companies grow into more tax
jurisdictions, they’re forced to deal with
doing annual projections and estimates to
accrue taxes for federal, state and many
international jurisdictions. This requires
the right detail information and knowledge
of many jurisdictions’ tax rules and laws.
Additionally, they must have proper third-party arrangements with their subsidiaries
to properly pay tax in foreign jurisdictions
when the company does business internationally.
Second, companies historically relied on
their accounting firm’s advice to help them
book items and find the right answers.
Today, accounting firms that perform corporate audits are essentially handcuffed by
the rules around Sarbanes-Oxley and the
Auditor Independence Act. It’s now up to
management to have all the processes and
resources in place to properly account for
taxes.
Companies are being forced to reallocate
their limited resources from tax return
preparation and planning into the tax provision area. It seems more and more that
the role of a tax professional is no longer a matter of minimizing taxes; it’s now a matter of properly accounting for taxes for
financial statement purposes.
How are companies working through these
issues?
Companies have been hiring additional
resources for the skills to make these
accruals, and to make sure that management has the tools in place to calculate
these estimates and fulfill the requirements
that the auditors will address.
Many companies simply do not have the
bandwidth to accomplish the necessary
tax provision work and want a third party
to review what they’ve done internally
from a compliance and SOX perspective to
make sure it’s right. They need to make
sure they’ve gone through enough internal
processes to be able to represent that they
have done all the steps, and that they have
enough intellect and knowledge to properly represent to the auditors that they’ve
done their job in making this accrual. I
spend about 90 percent of my time helping
companies think through all of the issues
and to put all of the documentation in place, while working with the audit firms
to get the client through this quarterly
process.
How are 123R and FIN 48 impacting the tax
provision process?
It seems like every year there has been a
new wrinkle on how the Financial Accounting Standards Board (FASB) or IRS is
making the provision process more complicated. Two years ago, it was the adoption of 123R that significantly complicated
stock option accounting, and the tax benefits of the related option deductions.
This year brought us FIN 48, the new
rules for accounting for uncertainty in
income taxes, which was formerly addressed by FAS 5 (accounting for contingencies). The accounting firms themselves
are dealing with this for the first time, making the process even harder for companies
that need advice.
Why should companies hire internally or
seek outside resources?
CFOs should be aware of FIN 48 and its
implications to their companies. Are they
meeting all of the disclosure rules? What
are the ramifications that are going to
impact their effective tax rate and earnings
per share? Do they understand these issues
and can they articulate that to their Board,
their auditors and analysts? The path to
that understanding is through hiring the
internal resources, outsourcing the function or a combination of both.
DAVID SORDELLO, CPA, is a tax partner with Armanino
McKenna LLP in San Jose. Reach him at [email protected] or
(925) 790-6403.
