2013 - Issue 14—How would you rate your last year-end tax close process? Are there certain aspects of the process that are causing you to incur additional time that would be better spent elsewhere? The year-end and interim tax close process has become very complex, while at the same time the numbers are being more closely scrutinized than ever before. Tax professionals are continually challenged with monthly and quarterly internal and external reporting requirements that are due within tight timeframes. If you are looking to analyze and improve the tax close process, now is a good time to review the process and develop a plan to implement value-added changes before the end of the year.
In this edition of Tax Advisor Weekly, I address some questions and components of the process to think about as you go through this analysis. The focus here is to address a few items that can be implemented during the year without overburdening the tax function.
My tax close process is complex and time-consuming. Where should I start my analysis?
This is a question we often hear from clients starting the assessment of the tax close process. Several workpapers, processes, tasks and other components can make this analysis a challenging exercise with the limited amount of time that tax professionals have for projects outside their daily responsibilities. However, this analysis can be accomplished when time is limited by focusing on one or two key areas that will dramatically help improve the process. Taking a phased approach, by addressing one or two items each quarter, is an effective method for building a finely tuned process.
When starting an analysis of the tax close process, it is usually beneficial to start off by addressing a few questions such as:
1. What is the greatest challenge (or time-intensive part) of the current process?
- Receiving data in a timely manner to start the process
- Confirming the accuracy of some of the data received
- Manipulating data to develop the information needed
- Loading data into the tax provision software or workbook
- Computing the subpart F income and foreign tax credit amounts
- Generating the required journal entry
- Calculating the state provision
- Delivering the required numbers to management in a timely manner
- Needing more time to step back and analyze the numbers
- Incorporating late entries into the process
2. How long does it take to complete a quarterly and year-end tax close?
- Break down the process by task by hours or days — create a document for this that will support the analysis.
- Document the difference between an interim and year-end close (if applicable), since the process is quite different for many companies.
3. What components are creating bottlenecks?
- Based on the answers to the above questions, look to see if one or two items stick out as bottleneck drivers.
4. Has the time associated with the tax close process changed over the past several quarters?
- If the amount of time has changed to complete the process, was this due to an organizational change, acquisition, resources or other events?
- If so, describe the changes that have occurred and how they have affected the process.
After these questions are addressed (as well as others that you think of as you go through this exercise), document and review your initial thoughts. The next step will be to take this information and prioritize the items based on their impact on the process. Keep in mind that this is only the first look at the tax close process for this exercise and that the determination of what area should be addressed may be updated as you go through the items discussed below.
What are some components that should be considered when completing this analysis?
Now that you have gone through the exercise of answering several questions about the tax close process, give some thought to the items listed below and how they affect the overall process and possibly fit into what you have already identified from above. The items listed below are some of the components of the process that companies are using to deliver faster and more accurate results while mitigating risk. Each company will have its own unique set of facts and circumstances that will produce additional areas to be considered other than what is shown below. As you go through this process, think about unique items specific to your company that should be addressed and add them to your list for analysis.
1. Loading Financial Data
- The ability to quickly load data into the tax provision software or workbook model is critical for reducing time within the tax close process. Risk can be mitigated and accuracy improved depending on how the data is loaded into the system.
- Tax provision software solutions offer the capability of loading data (which may include the entire trial balance) via specifically formatted imports and/or through the use of additional software that loads the required data directly from the general ledger or enterprise resource planning (ERP) system.
- Using macros is an effective way to load the required data into a workbook model. In order for this to be a value-added process, the required data from the general ledger or ERP system must be easily extracted and in a consistent format.
2. Reengineering Inefficient Processes
- Process map the most troublesome processes by bringing together all of the parties involved in the process. This will quickly highlight inefficiencies, misunderstandings and bottlenecks. Oftentimes, numerous high-value but low-effort remedies will arise from this exercise.
- The process mapping will also help the tax department to prioritize and to determine when outside assistance is necessary.
3. Leveraging the Trial Balance and Automation
- Most companies will generate the biggest benefit to their process by leveraging off the trial balance. Leveraging off the trial balance is the process of automating tax adjustments directly from the trial balance, based on mapping rules and formulas that are set up in your provision software or workbook model.
4. Journal Entry
- Generating the required journal entry can be a tedious task, especially when late accounting entries are recorded.
- Developing a journal entry within a provision software application is highly effective and reliable. Some software applications allow for custom configurations that permit the users to meet specific needs for their reporting requirements.
- If you are using a workbook model, is the journal entry built into the model or are you having to input numbers from multiple data points?
5. Integration with Compliance Package
- Have you integrated the provision and compliance processes?
- Integrating the provision and compliance process will provide substantial time savings to the overall tax process.
- Does your provision tool provide you with all the reports that are required?
- Are you manually populating reports with results from multiple data points each quarter?
You have now answered several questions about the tax close process and considered some areas that can have an immediate impact to the process. Take this information and develop a list that prioritizes all of the items in the order that you believe will deliver the greatest benefit to the process.
The next step will be to develop a detailed project plan (for the one or two items that you choose) for accomplishing the enhancements before year-end. Don't forget to include time for testing and possibly passing internal control procedures.
When is a good time for implementing tax close process changes?
The correct time for implementing changes to the process will vary from organization to organization depending on the resources available, daily responsibilities, mergers and acquisitions, audits, etc. However, having a discussion towards the beginning of the year about enhancements that should be implemented will give you more flexibility to schedule the action items appropriately on your calendar. As tax professionals are aware, the further we get into the current year, the more difficult it is to complete projects before year-end.
Schedule only what you believe can be accomplished during the timeframe that you establish, and be realistic when determining your timeframe. Oftentimes, the timeframe is shortened to save costs, to "go live" as quickly as possible, to meet internal audit requirements and other similar items. The more realistic you are with your timeframe for completing your enhancements, the better chance you will have of successfully implementing the required change.
Alvarez & Marsal Taxand Says:
Implementing value-added changes to the tax close process can be challenging, but the benefits can be substantial. In most cases, the entire process does not need to be overhauled to generate short-term gains that will reduce the time incurred, mitigate risk and increase the accuracy of the numbers. Going through the exercise described above will help you determine what enhancements should be made to the tax close process to generate the additional benefits you are seeking. Taking the time to discuss these items early in the year will allow for better planning, execution and delivery of the enhancements to your tax close process.
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