Simplifying FAS 109 Featured

8:00pm EDT July 26, 2008

Search the Federal Accounting Standards Board (FASB) Web site for information about FAS 109 and you will find 14 pages of technical bulletins, accounting pronouncements, interpretations, opinions and assorted topics. No wonder accountants think it is so complicated. Yet, FAS 109 can be made easier for those who do not work with it consistently — and, at times, for those who do.

Satisfying FAS 109 requirements can be simplified, especially if the parties involved listen to one another’s concerns, work together to boil the standard down to its nuts and bolts, and resolve any inconsistencies that exist in the reporting process.

Smart Business spoke to Jim Parks of Burr, Pilger & Mayer LLP about how to demystify FAS 109, access experts and employ effective communications as a tool for the tax provision process.

What is FAS 109?

FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences. Its primary objective requires companies to recognize the amount of taxes payable or refundable for the current year and compute deferred income taxes for future tax consequences of events that have been recognized in their financial statements or tax returns.

Why is meeting those requirements so complicated?

It doesn’t have to be. There is no doubt that FAS 109 can be frustrating even for people who work with it regularly. But, satisfying its requirements lies in distilling the tax preparation process into five separate and distinct steps for calculating tax provisions: identify permanent and temporary differences, calculate current income tax expense, calculate deferred income taxes, determine the need for a valuation allowance, and record the calculations on the financial statements.

Following these steps enables someone reasonably proficient in accounting and tax matters to prepare a tax provision. Virtually all tax provisions and software follow these steps in some fashion.

How can companies navigate through the calculations and required documentation?

One way is to follow Edmund Burke’s advice: ‘Good order is the foundation of all great things.’ Building on that premise means including in the process the proper tools and worksheet templates. But they won’t do the trick alone. Tax preparers need a little more to be successful! One path is to partner with trained and experienced preparers, utilize state-of-the-art technology and apply well-defined processes and procedures.

What benefits accrue from following that advice?

Tax provisions prepared by experienced personnel with the proper procedures in place yield better results. Regarding the people process, tax provisions should be prepared by trained and qualified individuals familiar with the local jurisdictions. The preparers could include in-house personnel and outside professionals. It is highly recommended that personnel familiar with the applicable jurisdiction prepare and/or have input on a tax provision. This is particularly important for foreign and state jurisdictions.

What role do technology and processes and procedures play in satisfying requirements?

Adequate technology is essential to a well-prepared tax provision. Companies and their outside accountants demand it. There are several good software programs available to preparers. Many companies, however, use Excel-based programs very efficiently. A world-class software template should be able to address downloading of company financial statements, automatic book/tax difference updates, jurisdictional issues, currency conversions, foreign tax credits, valuation allowances, etc. Additionally, documentation supporting the calculations and technical conclusions reached should be clearly presented and understandable to the reader.

The processes and procedures applied should be used with a high degree of integrity. Any deviation will likely produce unsatisfactory results. Through strict adherence to the tax provision processes and procedures companies can consistently ensure quality. This often entails the use of checklists, flowcharts and internal and external reviews.

Should the tax preparation process be done independently by internal personnel and advisers?

No. Companies need significant coordination among their auditors, outside service providers and internal personnel. Everyone is better served if they are talking ‘on the same page’ two to three times a year. This is one of most important elements of the tax preparation process. It’s also where professionals can excel and provide better services.

The tax preparation process should include a series of meetings among the practitioners that clearly lay out the expectations, time-lines and deliverables, and measure against desired results. A planning meeting maps out expectations. A post-review meeting is essential to obtain feedback, which enables everyone involved to adjust accordingly and learn.

Systemic coordination of the tax provision process is a key element to success. It’s a function of consistently improving upon what works the best. And, it doesn’t hurt to listen to what others have to say.

JIM PARKS is a tax partner with Burr, Pilger & Mayer LLP ( Reach him at or (408) 961-6383.