By Frances Alonso and Darian Harnish
One of the biggest challenges facing corporate tax departments, specifically provision professionals, is compliance with the Financial Accounting Standards Board’s updated requirements on income tax disclosures.
The FASB’s Accounting Standards Update 2023-09 significantly impacts income tax disclosures, calling for detailed reporting on effective tax rates and cash income taxes paid. Aimed at enhancing tax fairness and equity globally, especially in light of OECD’s efforts to implement a 15% global minimum tax, it seeks to provide investors with deeper insight into an entity’s global operations, tax risks, and prospects for future cash flows.
Adopting the new standard imposes significant challenges on corporate tax departments, including the timing of footnote disclosures, decision-making in terms of adoption methods, increasing complexities in financial reporting, and resource constraints within tax departments. These issues, combined with demands for more real-time data, put immense pressure on already stretched tax teams.
Tax provision software offers several features to streamline compliance and improve efficiency, accuracy, consistency, and audit readiness. Below are three capabilities modern provision software provides to help organizations comply with ASU 2023-09.
1. Real-time updates
One advantage of using provision software is staying up to date with the latest tax laws and rates. This is particularly critical given the frequent changes in tax legislation at the federal, state, and local levels. Advanced provision software automatically updates with the latest tax laws and rate changes to reflect the most current data in tax provisions.
Additionally, tax teams can run multiple versions of the provision and compare the data sets to identify the effects of late-adjusting journal entries. Alternatively, they could model the potential effects of proposed tax law changes on the provision and compare to their current model.
2. Simplified rate reconciliation preparation
The rate reconciliation is one of the most time-consuming aspects of the provisioning process, but tax provision software simplifies this step. Software that automatically stays in balance can generate a detailed rate reconciliation that agrees with the total income tax expense calculated.
Provision software also simplifies the reconciliation process by identifying material impacts on the overall provision. Tax departments can quickly spot and address significant adjustments or changes. Software solutions with integrated accounting for the payable and unrecognized tax benefits ensure that all components of the provision are included in the software, thus avoiding the need to further modify a system-generated rate reconciliation. This saves time and minimizes the risk of manual errors, such as misclassifying items or failing to update formulas.
3. Audit-ready reports
Preparing for an audit requires detailed and transparent documentation of tax provisions. Provision software can generate audit-ready Excel reports that include all necessary formulas. This capability provides auditors with all the information they need to understand how calculations were made and how elements of the provision relate to one another.
Audit-ready reports help avoid delays and complications during the audit process, as auditors can access well-organized, comprehensive documentation that ties all elements of the provision together. It also makes it easier to provide auditors with comparative reporting if there are multiple versions of the provision.
Choosing the right tax technology for your organization
With the complexities of new reporting standards and increased scrutiny on tax disclosures, tax departments need a solution that meets regulatory requirements and integrates into the organization’s broader financial technology stack. Below are the five key factors to consider when choosing a tax provision solution.
1. Internal controls: One of the most important—yet often overlooked—considerations when adopting new tax technology is its impact on internal controls. Complying with ASU 2023-09 likely requires changes in the company’s internal controls to ensure that data is readily available and that review processes consider the additional income tax disclosures. Most software solutions provide SOC 1 reports to their customers.
Internal controls should be built into your tax provisioning solution to prevent errors, detect inconsistencies, and ensure compliance. This includes establishing checkpoints for data validation, giving appropriate personnel access to the necessary information, and setting up reviews for rate reconciliations and provision adjustments. Integrating strong internal controls reduces the risk of errors and noncompliance while improving the efficiency of tax reporting.
2. Scalability and flexibility: Another crucial consideration is whether the chosen software is scalable and flexible enough to accommodate your organization’s evolving needs. As businesses grow or experience changes in their tax obligations—such as entering new jurisdictions or expanding their operations—the tax technology must be able to handle increased complexity without requiring a complete overhaul.
Scalability ensures that the system can support a growing number of users, transactions, and jurisdictions. A flexible system is easy to update as new requirements emerge.
3. Integration with other systems: Effective tax technology must integrate seamlessly with your existing financial reporting systems. The tax software should communicate with enterprise resource planning (ERP) platforms and other systems. Integration reduces the need for manual data entry, minimizes the risk of errors, and allows for real-time data sharing across departments.
For example, when preparing for ASU 2023-09 compliance, your tax provision solution can pull data directly from other systems used in the provision process, ensuring that all relevant information—such as foreign jurisdiction taxes, cash payments, and permanent items—is automatically included in the final provision.
4. Vendor reputation and customer support: Vendor reputation and customer support are critical when choosing any technology. Work with a provider with a track record of delivering compliant and reliable tax solutions. Evaluate the vendor’s experience in the industry, customer reviews, and the stability of the technology they offer.
Strong customer support is also essential, especially during the implementation phase. Selecting a vendor that provides ongoing assistance, clear documentation, and responsive service when issues arise makes a big difference in the success of the implementation.
5. Implementation ease: Another factor to consider is the ease of implementation. Your chosen technology shouldn’t disrupt your regular workflows. You need a system that can be implemented with minimal downtime so the tax department can maintain operations while transitioning to the new technology.
An intuitive user interface ensures the system is easy to use once implemented. The provision model should be straightforward, with inputs that mirror the existing tax provision processes, making it easier for tax teams to adopt the software without extensive training. While some training is always necessary, the goal is to choose a solution where the inputs resemble a provision model, making it easier for users to transition and use the system effectively with fewer hours of training.
Tax provision technology alleviates many challenges associated with adapting to ASU 2023-09, especially in a resource-constrained environment. By automating essential tasks, integrating data systems, and enhancing reporting capabilities, corporate tax departments are better prepared for compliance.
ABOUT THE AUTHORS:
Frances Alonso is a product lead at Bloomberg Tax. Her diverse tax provision background at both Big Four and Fortune 500 companies has given her deep insight on the issues faced by corporate tax practitioners. She believes that technology is the future, and she is driven to deliver value for clients in the provision software space.
Darian Harnish is a senior manager in the Washington National Tax office of RSM US LLP. He works diligently to tackle complex challenges in accounting for income taxes under ASC 740. Harnish assists client teams in determining the appropriate treatment of complex or unusual transactions at the nexus of financial reporting and tax law. He also monitors changes in tax law and accounting guidance for implications for RSM clients. He serves a variety of clients across industries, including private equity portfolio companies, companies considering a go-public transaction, and middle-market publicly traded corporations.
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