DOCSLIB.ORG

Solving the Toughest Audit Challenges to Your Tax Provision

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Solving the Toughest Audit Challenges to Your Tax Provision Solving the Toughest Audit Challenges to Your Tax Provision or… How to Make Your Auditors Love You and Your Tax Provision Audit Challenges to the Provision ASC 740 are the rules governing how we show income taxes on the financial statements Goal: Accurately represent what will end up on tax returns in the balance sheet Audits are performed to provide independent verification that the rules have been followed and the procedures are sufficient to accurately represent the financial position Goal: Identify incorrect application of the rules Goal: Identify procedures that create risks to the results Audit Challenges to the Provision Toughest ASC 740 Technical Challenges: Balance sheet approach Required detail Toughest ASC 740 Process Challenges: Tax is last Estimates Controls Technical Challenge – Balance Sheet Approach ASC 740-10-10-1 The entity’s overall objectives in accounting for income taxes under ASC 740 are to: 1. “…recognize the amount of the taxes payable or refundable for the current year” and 2. “recognize deferred tax liabilities and the assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.” Challenge is that tax returns are a P&L approach Keys to embracing the Balance Sheet Approach 1. Understand it: Focus on and orient to the payable and deferreds 2. Trust it: Let the rate “fall out” 3. Embrace it: Get rid of your FAS 109 processes and tools that trick you into starting at the wrong end Technical Challenge – Required Detail ASC 740-10-55-25 “…ASC 740-10 requires a separate deferred tax computation when there is a significant difference between the tax laws of that and other tax jurisdictions that apply to the entity.” Challenge is the diminishing returns of detail; at what risk? Keys to embracing the detail 1. Recognize the work you are already doing to avoid the detail 2. Identify the specific items which make a jurisdiction different o Rates o Pre/Post NOL c/f o Credits o Consolidations 3. Leverage work you have to do anyway… the returns 4. Work the detail from the small bits; isolate the calculations Process Challenge – Tax is Last ASC 740-10-20 indicates that only “income taxes are within its scope and defines income taxes as… “…domestic and foreign (national), state and local (including franchise) taxes based on income… [which is] the excess of taxable revenues over tac deductible expenses and exemptions for the year as defined by the governmental authority.” Challenge with income tax is you need income to begin Keys to being successful when you’re last 1. Deconstruct the calculation to the smallest relevant parts which will all you to be more nimble in the calculation 2. Calculate and aggregate separately 3. Effectively use of estimates Process Challenge - Estimates ASC 740-10-05-5 considers the uncertainty through the application of measurement and recognition criteria… “There are two basic principles related to accounting for income taxes which considers the uncertainty through the application and measurement criteria: 1. To recognize the estimated taxes payable or refundable… 2. To recognize a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences…” Challenges with estimates is making the estimate Keys to the effective use of estimates 1. Decide which items are estimates (and don’t pretend it’s real…) 2. Correction of error v. change of estimate? Often the decision lies with how you approached computation (see ASC 250-10-20) 3. Document the assumptions that make the estimate reasonable Process Challenge - Controls COSO Internal Control - Integrated Framework (May 2013) – outlines how an effective control environment can be established with one of the primary objectives being to… “A means to identify and analyze risks, and to develop and manage appropriate responses to risks within acceptable levels and with a greater focus on anti-fraud measures” Challenge with tax internal controls is the timing and complexity of ASC 740 calculations Keys to successful tax internal controls are 1. Identify the items that move the needle 2. Control as you go 3. Integrated and embedded documentation including evidence of review Summary & Take-Aways Embrace the Balance Sheet approach o More accurate o Supports the mental shift from tax returns to financial statements o Focuses effort on those things that matter Embrace the detail o Small things matter; combinations of small things become big o You have returns for each item, provision should not be different Deconstruct the calculations (and tools) o Understand the difference between integrated and kludge Make the call before you start: estimate or actual o “Best way to get chaffed is riding the fence” Control is a way of life not an addendum o You are already doing everything you need to do from a technical and procedural standpoint. Document it as you go so you get credit! Case Study – ACT Corp examples Contact Stephen or Nick for detail on the case study or a demo of how Tax Prodigy Provision helps solve these challenges [email protected] [email protected] .
Load more

Recommended publications
  • Tax Accounting Perspectives ASC 740 Considerations As Income Tax Returns Are Finalized September 28, 2018
    Tax Accounting Perspectives ASC 740 considerations as income tax returns are finalized September 28, 2018 Tax provision processes include analyzing the impact of changes for “return-to-provision” items that result when estimates used for the provision are different than amounts reported on income tax returns. Companies should record the tax accounting impact in the period they identify the adjustments and may need to differentiate these from SAB 118 adjustments. What's new? Potential tax expense (or benefit) for adjustments related to temporary What's new differences Potential tax expense (or benefit) The tax accounting impact of return-to-provision (“RTP”) adjustments (also for adjustments related to known as return-to-accrual adjustments or true-ups) should be recorded in the temporary differences period identified. Adjustments may be identified or finalized in the period income tax returns are filed assuming they are not known in an earlier reporting period. For calendar-year companies, returns are due in the fourth quarter and companies finalize RTP adjustments at that time. This timeframe coincides with Highlights the end of the up to one-year measurement period provided by SAB 118 that Analyzing return-to-provision requires final adjustments be recorded for the impact of tax reform. Therefore, adjustments many companies are evaluating both RTP and measurement period adjustments at the same time. After tax reform, adjustments for temporary differences that historically may not have impacted a company’s overall tax expense may now impact a company’s overall tax expense or benefit. For example, a calendar- What does this mean for you year corporation may have a RTP adjustment that increases or decreases Documenting change in estimate current taxes at a 35% rate with the offset to deferred taxes at a 21% rate, ‒ which would impact the overall tax expense.
    [Show full text]
  • Computation of Deferred Tax Liability — an Example
    Farm Management Guide MF-2358 Computation of Deferred Tax Liability — An Example Department of Agricultural Economics — www.agmanager.info Kansas State University Agricultural Experiment Station and Cooperative Extension Service Michael R. Langemeier Professor, Agricultural Economics An income tax liability arises from differences between payable and accrued interest, from total deferred income balance sheet values of certain assets and liabilities and the calculated. The current portion of deferred taxes is then tax basis of those same assets and liabilities. Farm financial computed by multiplying an estimated total tax rate — statements, especially the balance sheet, should be pre- which reflects federal, state, local, and social security taxing pared with recognition given to this income tax liability, or authorities — times the net deferred income. deferred taxes. Step 2. Computation of noncurrent portion of deferred Deferred taxes reconcile the tax basis of a balance sheet taxes related to differences between market values and tax with the basis currently being used for valuing assets and basis or base value of noncurrent assets. (See Table 3 for recording liabilities. That is, if all assets could be liquidated example computations.) Calculate the difference between for exactly the amount shown on the balance sheet, and if the balance sheet market values of all noncurrent assets and all liabilities could be satisfied by payment of exactly the their tax basis. Noncurrent assets include breeding livestock, amount shown on the balance sheet, then what taxable machinery and equipment, real estate, and improvements. income would result and what would be the tax liability? The tax basis will be zero for raised breeding livestock that The asset and liability values outlined in the example have not been capitalized and depreciated for tax purposes.
    [Show full text]
  • Recognition and Disclosure of Deferred Tax in Financial Statements
    Recognition and disclosure of Deferred Tax in Financial Statements By Harshani Rajapaksha What is Deferred Tax Definition Deferred Tax is the amount of Income taxes payable /recoverable in future periods in respect of taxable/ deductible temporary differences. A deferred tax liability is the result of differences in the way a company does its financial accounting for reporting purposes according to generally accepted accounting principles (GAAP) versus tax accounting. Temporary Differences Temporary differences are between the carrying amount of an asset or liability in the Statement of Financial Position and its tax base. Temporary Differences may be either: Taxable Temporary Differences: Which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Deductible Temporary Differences: Which are temporary differences that will result in amounts that are deductible in taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. The tax base of an asset or liability is the amount attributable to that asset or liability for tax purposes. Recognition of Deferred Tax Liabilities Deferred Tax Liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred Tax = Taxable Temporary Differences * tax rate (future) A deferred tax liability should be recognised for all taxable temporary differences, unless the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which Is not a business combination and At the time of transaction, affect neither accounting profit nor taxable profit (or tax loss) Recognition of Deferred Tax Assets Deferred Tax assets are the amounts of income taxes recoverable in future period in respect of Deductible temporary differences.
    [Show full text]
  • Financial Forecasts and Projections 1473
    Financial Forecasts and Projections 1473 AT Section 301 Financial Forecasts and Projections Source: SSAE No. 10; SSAE No. 11; SSAE No. 17. Effective when the date of the practitioner’s report is on or after June 1, 2001, unless otherwise indicated. Introduction .01 This section sets forth standards and provides guidance to practition- ers who are engaged to issue or do issue examination (paragraphs .29–.50), compilation (paragraphs .12–.28), or agreed-upon procedures reports (para- graphs .51–.56) on prospective financial statements. .02 Whenever a practitioner (a) submits, to his or her client or others, prospective financial statements that he or she has assembled, or assisted inas- sembling, that are or reasonably might be expected to be used by another (third) party1 or (b) reports on prospective financial statements that are, or reasonably might be expected to be used by another (third) party, the practitioner should perform one of the engagements described in the preceding paragraph. In de- ciding whether the prospective financial statements are or reasonably might be expected to be used by a third party, the practitioner may rely on either the written or oral representation of the responsible party, unless information comes to his or her attention that contradicts the responsible party's represen- tation. If such third-party use of the prospective financial statements is not reasonably expected, the provisions of this section are not applicable unless the practitioner has been engaged to examine, compile, or apply agreed-upon procedures to the prospective financial statements. .03 This section also provides standards for a practitioner who is engaged to examine, compile, or apply agreed-upon procedures to partial presentations.
    [Show full text]
  • Cash Flow Statement
    LESSON 7 Cash Flow Statement 1 Financial Accounting 08/09 2ºDE – LESSON 7 © Mª Cristina Abad Navarro, 2009 Outline 7.1. Introduction: definition and purpose. 7.2. Format of the Cash Flow Statement. 7.3. Definition of cash and cash equivalents. 7.4. Cash flows from operating activities. 7.5. Cash flows from investing activities. 7.6. Cash flows from financing activities 2 Financial Accounting 08/09 2ºDE – LESSON 7 © Mª Cristina Abad Navarro, 2009 1 The annual accounts Balance Sheet Income Statement Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements 3 Financial Accounting 08/09 2ºDE – LESSON 7 © Mª Cristina Abad Navarro, 2009 Statements of financial flows Includes information about: • Financial resources (cash flows) obtained by the firm during the period • Applications of those financial resources (cash flows) Business Operating Purchase of activity activity assets Shareholders’ Distribution of contributions Dividends New debt Payment of debt . Sale of assets . 4 Financial Accounting 08/09 2ºDE – LESSON 7 © Mª Cristina Abad Navarro, 2009 2 Cash Flow Statement The Cash Flow Statement shows: • cash receipts, and • cash payments during the year. These cash receipts and payments explain the changes in the cash account (*) of the Balance Sheet during the year. (*) Cash will include cash and cash equivalents 5 Financial Accounting 08/09 2ºDE – LESSON 7 © Mª Cristina Abad Navarro, 2009 Cash Flow Statement Regulation INTERNATIONAL IAS 7 SPANISH P.G.C. 2007 Is voluntary for: • Companies that can publish abbreviated
    [Show full text]
  • Deferred Tax Accounting in an Acquisition Is Essential
    Vol. 25 No. 12 December 2013 300th Issue! Attention to Detail: Deferred Tax Accounting in an Acquisition is Essential By Glenn Richard James, JD, CPA acquisition are not likely to Accounting standards require that deferred taxes constitute a useful proxy for be recorded on every difference between the book the tax basis of those assets and tax basis of assets and liabilities acquired in and liabilities. an acquisition save one: the excess of goodwill It is important to note recorded for financial statement accounting over that there are special issues the tax basis of goodwill acquired. involved in the fair valuation The principles can be tricky to apply, especially of liabilities. Certain in situations where the deal is structured as an asset liabilities are not recognized purchase versus a stock purchase, or when there as such for income taxes, is a bargain purchase price. In either structure, and, consequently, will always give rise to an each asset and liability acquired is separately fair opening deferred tax asset. For example, there valued to determine the basis of acquired assets is no tax liability for an ASC 840 (formerly FAS and liabilities at the acquisition date; and there is 13) rental obligation or a capital lease obligation no limit on the fair value of net assets acquired. in respect of a lease treated as an operating lease However, for income tax purposes, only the asset for income taxes. Then there are the liabilities for purchase structure gives rise to a fair valuing of deferred taxes, which are ignored and do not cause assets, and even then the net value of assets acquired the recognition of further temporary differences.
    [Show full text]
  • Bank & Financial Institution Modeling
    The Provision for Credit Losses & the Allowance for Loan Losses How Much Do You Expect to Lose? This Lesson: VERY Specific to Banks This is about a key accounting topic for banks and financial institutions. It’s only important in that industry. So if you are not interested in banks, you don’t have to watch this (unless you really want to…). Lesson Outline: • Part 1: Allowance for Loan Losses vs. Regulatory Capital • Part 2: Loan Loss Accounting on the Financial Statements • Part 3: Example Scenarios to Illustrate the Mechanics • Part 4: How Regulatory Capital and the Allowance for LLs are Linked Business Model of Commercial Banks • Banks: Collect money from customers (deposits), and then lend it to people who need money (loans) • They expect to lose something on these loans because people and companies default and are unable to pay back their loans • But there are two categories: expected losses and unexpected losses (e.g., a random disaster happens and everyone in a certain region of the country loses everything) • This Tutorial: All about expected losses and how unexpected losses eventually turn into expected losses Expectations Matter! • Poker Scenario: If you bet a lot with no real hand, you should expect to lose everything… and plan accordingly! • But: What happens if you have a Straight Flush and you then do the same thing? Now you expect to win… or at least not lose much • But Then: You keep playing, and it turns out someone else has a Royal Flush – you lose everything you bet! Oops. • First Scenario: Allowance for Loan Losses – Expected Losses • Second Scenario: Regulatory Capital – Unexpected Losses Allowance for Loan Losses on the Statements • Balance Sheet: The Allowance is a contra-asset that’s netted against Gross Loans to calculate Net Loans .
    [Show full text]
  • Economic Brief March 2012, EB12-03
    Economic Brief March 2012, EB12-03 Loan Loss Reserve Accounting and Bank Behavior By Eliana Balla, Morgan J. Rose, and Jessie Romero The rules governing banks’ loan loss provisioning and reserves require a trade-off between the goals of bank regulators, who emphasize safety and soundness, and the goals of accounting standard setters, who emphasize the transparency of fi nancial statements. A strengthening of accounting priorities in the decade prior to the fi nancial crisis was associated with a decrease in the level of loan loss reserves in the banking system. The recent fi nancial crisis has prompted an bank’s fi nancial statements: the balance sheet evaluation of many aspects of banks’ fi nancing (Figure 1) and the income statement (Figure 2).2 and accounting practices. One area of renewed Outstanding loans are recorded on the asset interest is the appropriate level of loan loss side of a bank’s balance sheet. The loan loss reserves, the money banks set aside to off set reserves account is a “contra-asset” account, future losses on outstanding loans.1 Deter- which reduces the loans by the amount the mining that level depends on balancing the bank’s managers expect to lose when some requirements of bank regulators, who empha- portion of the loans are not repaid. Periodically, size the importance of loan loss reserves to the bank’s managers decide how much to add protect the safety and soundness of the bank, to the loan loss reserves account, and charge and of accounting regulators, who emphasize this amount against the bank’s current earnings.
    [Show full text]
  • Provisions Are Charged As an Expense to the Appropriate Service Line In
    Provisions are charged as an expense to the appropriate service line in the Comprehensive Income and Expenditure Statement where an event has taken place that gives the Council a legal or constructive obligation that probably requires settlement by a transfer of economic benefits or service potential, and a reliable estimate can be made of the amount of the obligation. Provisions are charged as the best estimate at the balance sheet date of the expenditure required to settle the obligation, taking into account relevant risks and uncertainties. L. Termination Benefits Termination benefits are charged on an accruals basis to the appropriate service at the earlier of when the Council can no longer withdraw the offer of those benefits or when the Council recognises costs for a restructuring. M. Changes in Accounting Policies Prior period adjustments may arise as a result of a change in accounting policies or to correct a material error. Changes in accounting estimates are accounted for prospectively, i.e. in the current and future years affected by the change and do not give rise to a prior period adjustment. Changes in accounting policies are only made when required by proper accounting practices or the change provides more reliable or relevant information about the effect of transactions, other events and conditions on the Authority’s financial position or financial performance. Where a change is made, it is applied retrospectively (unless stated otherwise) by adjusting opening balances and comparative amounts for the prior period as if the new policy had always been applied. N. Cash and cash equivalents Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours.
    [Show full text]
  • Accounting for Taxes on Income D.S.RAWAT, FCA
    Accounting for Taxes on Income D.S.RAWAT, FCA Comparison of Indian GAAP (AS-22) and US GAAP (FASB-109) Comparison of these two GAAPs is based on:- - Similarities between two GAAPs - Differences between two GAAPs - Additional area covered by US GAAP (FASB-109) and not covered by Indian GAAP (AS-22) Similarities between two GAAPs Both the GAAPs have laid down similar principles on following areas:- (1) Objective and Scope – tax on income is determined on the principle of accrual concept. According to this concept, tax should be accounted in the period in which corresponding revenue and expenses are accounted, in simple words tax shall be accounted on accrual basis and not on liability to pay basis. Taxes on income include all domestic and foreign taxes, which are based on taxable income. (2) Recognition and Measurement -As the income-tax expense should be treated just like any other expenses on accrual basis irrespective of the timing of payment of tax. Tax expenses for the period to be recognized consist of current tax and deferred tax. Current Tax- Current tax is the amount of income-tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period. Deferred Tax- Deferred tax is the tax effect of timing difference. Difference between the tax expenses (which is calculated on accrual basis) and current tax liability to be paid for a particular period as per Income-tax Act is called deferred tax (assets/liability). That is why the Tax Expenses = Current Tax + Deferred Tax. The difference between tax expenses and current tax arises only on account of timing difference and thus creating deferred tax asset/ liability (3) Measurement of current and deferred tax Current Tax- Current tax should be measured at the amount expected to be paid to (recovered from) taxation authorities using applicable tax rates and tax laws.
    [Show full text]
  • The Budget Reconciliation Process: the Senate's “Byrd Rule”
    The Budget Reconciliation Process: The Senate’s “Byrd Rule” Updated May 4, 2021 Congressional Research Service https://crsreports.congress.gov RL30862 The Budget Reconciliation Process: The Senate’s “Byrd Rule” Summary Reconciliation is a procedure under the Congressional Budget Act of 1974 by which Congress implements budget resolution policies affecting mainly permanent spending and revenue programs. The principal focus in the reconciliation process has been deficit reduction, but in some years reconciliation has involved revenue reduction generally and spending increases in selected areas. Although reconciliation is an optional procedure, the House and Senate have used it in most years since its first use in 1980 (22 reconciliation bills have been enacted into law and four have been vetoed). During the first several years’ experience with reconciliation, the legislation contained many provisions that were extraneous to the purpose of implementing budget resolution policies. The reconciliation submissions of committees included provisions that had no budgetary effect, that increased spending or reduced revenues when the reconciliation instructions called for reduced spending or increased revenues, or that violated another committee’s jurisdiction. In 1985 and 1986, the Senate adopted the Byrd rule (named after its principal sponsor, Senator Robert C. Byrd) on a temporary basis as a means of curbing these practices. The Byrd rule was extended and modified several times over the years. In 1990, the Byrd rule was incorporated into the Congressional Budget Act of 1974 as Section 313 and made permanent (2 U.S.C. 644). A Senator opposed to the inclusion of extraneous matter in reconciliation legislation may offer an amendment (or a motion to recommit the measure with instructions) that strikes such provisions from the legislation, or, under the Byrd rule, a Senator may raise a point of order against such matter.
    [Show full text]
  • Contingencies and Provisions
    U.S. GAAP vs. IFRS: Contingencies and provisions Prepared by: Richard Stuart, Partner, National Professional Standards Group, RSM US LLP [email protected], +1 203 905 5027 February 2020 Introduction Currently, more than 120 countries require or permit the use of International Financial Reporting Standards (IFRS), with a significant number of countries requiring IFRS (or some form of IFRS) by public entities (as defined by those specific countries). Of those countries that do not require use of IFRS by public entities, perhaps the most significant is the U.S. The U.S. Securities and Exchange Commission (SEC) requires domestic registrants to apply U.S. generally accepted accounting principles (GAAP), while foreign private issuers are allowed to use IFRS as issued by the International Accounting Standards Board (which is the IFRS focused on in this comparison). While the SEC continues to discuss the possibility of allowing domestic registrants to provide supplemental financial information based on IFRS (with a reconciliation to U.S. GAAP), there does not appear to be a specified timeline for moving forward with that possibility. Although the SEC currently has no plans to permit the use of IFRS by domestic registrants, IFRS remains relevant to these entities, as well as private companies in the U.S., given the continued expansion of IFRS use across the globe. For example, many U.S. companies are part of multinational entities for which financial statements are prepared in accordance with IFRS, or may wish to compare themselves to such entities. Alternatively, a U.S. company’s business goals might include international expansion through organic growth or acquisitions.
    [Show full text]