The number one request these days for corporations hiring is someone to handle accounting for income taxes. It is a major focus for companies these days because of the complexity involved in these calculations. We have been in contact with thousands of tax professionals regarding accounting for income tax roles and have been asking them how they handle these complex calculations. What I found most interesting are the many Fortune 500 companies who still use an Excel model they designed in-house for accounting for income taxes. On the other hand, I asked technology consultants what issues they see with Excel spreadsheet models. What I learned from experts was the disproportionate amount of time the tax professionals were spending on making sure the Excel spreadsheets are calculating correctly versus the real technical issues in an ASC 740 context.
What I learned was for most companies, the facts change from year to year. For instance, changes to accommodate new facts such as new entities, states or foreign jurisdictions, uncertain tax benefits or even new perms and temps. These changes require significant knowledge of the design and links within the spreadsheet model. Spreadsheet users are often required to make modifications to multiple tabs in the spreadsheet and ensure that they don’t break any formulas. This whole process introduces risk into the spreadsheet.
For example, something that should be very simple like adding a new entity will require numerous changes to a spreadsheet model:
- The federal current payable calculation and totals need to be updated.
- New deferred calculations will need to be set up including the appropriate tax effecting.
- State calculations will need to be set up or modified for each state the new entity is taxed in.
- The rate reconciliation will need to be updated to ensure that the new entity’s information is being captured correctly.
- A new payable tie out will need to be created for the new entity
Another point made was around sustainability. Spreadsheets can be very difficult and time consuming to maintain. There is often spaghetti like flow of data between tabs that is difficult to follow or modify. The spreadsheets often lack a clear distinction between which items are entry fields versus calculations and there may be hardcoded numbers hiding in formulas. When you compound these issues across multiple entities and jurisdictions and the various calculations (current, deferred, uncertain tax benefits) needed for each, the complexity can become extremely difficult to manage. All of these factors make it difficult for organizations to leverage more junior staff to assist in using the spreadsheet models which compounds the risk of errors since senior professionals are often doing more of the work rather than reviewing.
Another big issue is pure technical accuracy! Beyond just understanding the flow of the data in the spreadsheet, there are often calculations that are simply performed incorrectly in many spreadsheet provision models. Among the most common themes, we see a lot of issues with tax effecting things correctly in particular around states and foreign jurisdictions. Uncertain tax benefits are often calculated separately and aren’t integrated into the overall provision. Many spreadsheets processes lack a rigorous payable tie out that is integrated with the overall provision. Finally, rate reconciliations are often difficult to tie out to the entry and require significant effort.
Anecdotally, technology consultant Nick Frank was telling us they were working on an implementation of Tax Prodigy software with a relatively simple new client that has one operating entity and a couple small entities. The client is in about 10 states and has small net operating losses in the current year. The company used large global firm to prepare the income tax provision in a spreadsheet model but was looking to move the process in-house. The company’s financial statement auditors are also global accounting firm.
In just 3 hours of implementation time they had tied out all of the calculations. In that brief time, they identified several ways that the spreadsheet would be difficult to maintain on a go forward basis as the company grew. But more concerning, they found several technical errors in the provision spreadsheet. In fact, a significant portion of the implementation time was spent trying to understand the flow of information in the spreadsheet to validate why the errors were occurring.
When a company with a straight forward set of facts pays tens of thousands of dollars to a global firm to calculate its provision, the expectation is that it should be correct. But all too often, what they see are spreadsheets designed to ignore certain technical requirements that aren’t material today and may not be sustainable as the business changes.
Want to learn more about ASC 740 and the TCJA?
We asked Nick Frank to conduct another of his ASC 740 training sessions. There is a complimentary session on Friday, August 16, 2019 at 9:00AM PST/10:00AM MT/11:00AM CT and 12:00Noon EST.