As financial reporting evolves, the Financial Accounting Standards Board (FASB) Accounting Standards Update 2023-09—Income Taxes (Topic 740) introduces significant shifts that tax professionals must navigate. To shed light on the practical implications and critical challenges posed by the update, including enhanced data collection requirements, jurisdictional disparities in reporting, workflow adjustments, and the increasing importance of technology integration in tax provision processes, Tax Executive convened the following panel: Jerry Fish, managing director and head of the ASC 740 group at the US national tax office of Andersen; Adam Bean, tax partner at Ernst & Young; and Frances Alonso, lead product manager at Bloomberg Tax. Sam Hoffmeister, Tax Executive senior managing editor, moderated the discussion.
Sam Hoffmeister: What aspects of the FASB update have posed or have the potential to pose the biggest challenges, from your perspective?
Jerry Fish: From my perspective, the biggest challenges companies are going to face is the data collection and data sorting that is going to be required under the new ASU, as the ASU does not change the amount of tax to be recorded. It only impacts the way in which it has to be recorded. And more detailed analysis will be required to be disclosed on the financial statements.
Adam Bean: I agree with Jerry. That is going to be a challenge. What I see a lot of times, to Jerry’s point, is that the data can be housed in different applications. It could be housed in Excel in certain areas of a provision. It could be housed in a Onesource tax provision or a tax provision tool. How you bring those data points together for this is really going to be something that companies need to focus on.
Frances Alonso: As they both pointed out, the results are not different, but how you get there and the level of details needed have changed. This is a good time for teams to start thinking in what areas technology can help you to automate or to mitigate risk. It can help bring all of this information together and buy back time for the more critical matters.
When I talk about buying back time and using technology for this, I am not just talking about technology supporting the ASU—it is in a broader way. You can find other parts of the process where technology can help you. Try to get creative and find areas where technology can help automate. For example, how can you automate how you gather data and how you go through it?
Hoffmeister: What kinds of jurisdictional disparities might a tax professional experience, and what advice would you offer to avoid those disparities?
Fish: I think with one of the most important aspects of the ASU, which was not in the face of the ASU but in the basis for a conclusion, is that the FASB specifically states that paragraph 105 10-05-6 still applies to everything that is part of the codification, and that reconciling items do not need to be disclosed if they are not material, even if they meet the quantitative threshold. I believe that this comment or rule will drive diversity in reporting on the rate reconciliation as well as create differences in opinion between filers and their auditors. Some reporters may include all foreign jurisdictions that meet the quantitative threshold, while other companies may only disclose their five major foreign jurisdictions. In the first year of determining what is within the materiality scope, because the FASB thoroughly said that you don’t need to record [it] if it’s immaterial, even if the quantitative threshold is met, [this] will likely drive diversity in reporting. This is where I think it’s going to cause a lot of gray for filers: “FASB says I don’t have to do it unless it’s material, even if it is quantitative,” then there are auditors saying, “Well, we think once it meets the quantitative numbers, it becomes material.” I think that’s going to be a struggle in the early days.
Bean: I would add that issue will very much be acute in scenarios where you have foreign-parented entities with taxing rates that are low, whether that be below the US rate of twenty-one percent—or maybe you’re starting with the rate in Switzerland or Ireland at a much lower rate. I think it’s going to bring that issue home even more, because that five percent even gets lower. I think that will be important.
Alonso: As they pointed out, there are some gray areas, but regardless of how you expect to go about your disclosure, you still need to have a process that provides you all the details for you to be able to analyze and report on them. Even if you get your auditors on board with what you are required to disclose, you must have a way to prove that it is (or is not) material.
Hoffmeister: What workflow or process adjustments have you had to make or will have to make?
Alonso: Their entire provision calculation has to be revamped for them to be able to get to the end result with the level of details they need. This is why technology can be so helpful. A provision software can help ensure that your process is complete from beginning to end, [in that] it ensures that any changes done through the process are included and reflected all the way to the end of the provision process.
Bean: I would say clients are beginning this journey, for those that have not early adopted, and, you know, very few have early adopted. So, they’re beginning that journey. I think it’s really [about] beginning to understand where your data points are. Like we mentioned before, where am I going to gather my data points to be able to complete a complete disclosure? One thing I think can sneak up on tax departments is also the controls aspect of that for our public companies, making sure that their internal controls and the evidence around their internal controls are adapted to these new standards, where they’re gathering data for completeness and accuracy around this process.
Fish: We’re seeing a lot more focus around the controls and the process controls. As foreign jurisdictions become more material or their disclosure is above materiality, they will need more controls around the provisions, and we’re seeing a lot of companies looking for how to standardize all of their foreign reporting packages. A lot of large companies do not have standard foreign reporting packages. But now that material jurisdictions must be disclosed separately, having to convert all those different packages into the footnote instead of just plucking a couple of rate numbers and pretax book income numbers to get a consolidated worldwide provision. As a result, we’re seeing more steps being taken around the foreign provisions, which then, for Sarbanes-Oxley and internal control testing, need controls and testable key controls identified around those areas.
Bean: There needs to be auditable evidence related to how those controls operate.
Hoffmeister: What challenges—or perhaps
advantages—do you see from a technology perspective?
Alonso: When I think of how technology can help you with this particular change, I would say my advice is to look for a product that has as much detail as possible. Each team and company circumstance [is] unique, which means that some customization will always be needed, but if you have all the details, you can easily summarize how you want to display the information. The issue—and risk—really comes when you don’t have reports with enough details. Breaking out that information in a timely matter, while ensuring numbers at the end are still correct and complete, is not an easy task, especially the first time you have to do it.
Similar to what I mentioned before, you need to find different areas to create automation, not just at the end of the process.
Fish: I think that this is an opportunity for tax departments to enhance the integration of the tax provision process and provision records into the financial reporting system of [the enterprise resource planning software]. We have historically seen the tax provision disconnected from the rest of the financial reporting preparation. I think that with all this data coming from different points, for large corporations, it’s usually compiled within their ultimate reporting software or ERP, Hyperion, or SAP or whatever system they use. I think tax is going to have to more integrate their stand-alone provision softwares and processes and be more integrated with the overall financial reporting system as more and more information is going to become relevant and reportable for the tax provision. Their ERP system, the accounting ERP system, should be integrated with tax systems better in order to complete this information and complete it on a timely basis. Unlike the tax return process, where there’s an entire summer to get the data and get it in the right spots, the provision has to be done in a relatively short period of time. And it has to be updatable quickly for changes in pretax book income.
Bean: You’re doing all this in an environment where close windows are getting tighter and tighter to have your information complete. You need to be nimble to be able to make changes quickly, because the close windows are getting tighter and tighter with financial reporting.
Hoffmeister: How much does this emphasize that tax needs that seat at the table when it comes to technology decision-making?
Bean: I’m biased; I always think tax needs that. Especially in any ERP situation, they need to be at the table. This is no different. Tax needs to be at the table to make sure we’re getting the proper data to comply with the ASU.
Fish: Just reiterating the fact that tax is often not at the table when these decisions are made is a big problem—too often, the tax department is handed a round ball and given a square, a triangular, or a rectangular hole and told by accounting or legal, “Well, we’ve made the decision; now make it fit.” Tax could have easily been involved in the process for mapping of the accounts, what accounts need to be created, which ones are ancillary [or] nice to have. I always like to use the old FRAM oil filter commercial: “Pay me now or pay me later.” It’s always cheaper to pay me now. If the ERP systems are not built and integrated with the tax systems, the amount of time and cost on the back end—and that goes into perpetuity as every year when you do the provisions in return—that back-end cost becomes astronomically larger than having tax involved to help. When tax is involved, there’s always more spent on the ERP and more expansion, but that spend upfront saves a fortune in the back.
Bean: And it mitigates risk, which is very important. The more you push this down and have them closer and closer to not having the data, the risk increases. The tighter the timeline increases, there’s opportunity for risk of misstatement. It’s much, much higher in that scenario.
Hoffmeister: In the year of adoption, what should clients be anticipating for the prior years, even though the final ASU came out and said it would be prospective with full retrospective allowed, as opposed to in the drafts of the ASU [where] we had full retrospective as a requirement?
Fish: From what I’ve seen in talking to clients, every tax department wants to do prospective and not retrospective, but every financial reporting group wants to do full retrospective so there’s comparability. Tax departments should be planning now to get their 2024, and, if 2023 is disclosed, 2023 rate reconciliations into the new format and not be fighting with their financial reporting group in February of next year when the provision needs to be done in a day, and now they’re trying to go back and recreate two years because financial reporting says we need to have something that’s comparable. And going from pre-ASU to post-ASU 2023-09 has no comparability whatsoever.
Bean: My advice there is exactly what Jerry said. Tax departments certainly want to do prospective—that’s easier. But then when they go meet with financial reporting, financial reporting says, “I have no comparability.” CFOs and financial reporting will say, “You’re going to do it retrospective.” What I would say is clients or tax departments need to be meeting with their financial reporting group to determine which method they’re going to apply, which will most likely be retrospective.
Alonso: Even if you are doing it prospectively, you will have to understand how year-over-year compares to each other.
Hoffmeister: Any final thoughts or insights?
Alonso: Don’t wait for changes to happen for you to find ways to improve your process. There is still time to get ready; the time is now. Do not limit your view. Look at the entire process and to find different areas for improvement and see how technology can help.
Bean: Jerry and Frances, I don’t know about you, but there’s a very much a focus on the “rate rec [rate reconciliation disclosure].” Don’t forget there’s other parts of this, about the cash taxes paid disclosures and having the data for it. A lot of times we do know what we pay [in] our cash taxes. As strong tax professionals, we know that. But [when] gathering that data in a format that we would understand to be able to break it apart to comply with the ASU, don’t forget there are other parts, like changes to the APB 23 disclosure, changes to the uncertain tax position disclosure. Don’t forget there are other parts; it’s more than just the rate rec.
Fish: I would say that what departments really need to be focusing on right now is what additional resources are they going to need for the 2025 year-end provision in order to complete the provision in a timely manner and in the same time frame that they’ve historically had. Companies are not going to expand their close window because tax has some more reporting obligations. Obviously, tax is going to need more resources to get more work done in the same amount of time. And discussing with their CFOs or their reporting groups whether these additional resources are going to be internal, or is there going to be reallocation from other departments to help with the data collecting? Or is this something that’s going to be outsourced to have built and implemented in year one and then maintained internally in the years in the future? But it could be a significant cost, especially if there’s software integration, if there’s control improvements, that your key controls and test controls have to be updated, that involves getting your auditors involved early so they can do the test runs during the year. I think that the amount of budget that a department is going to need for 2025’s reporting year, tax executives need to be bringing that up with their higher-ups for approval of that budget expansion now, and not at the last minute.
As a person that worked in corporate tax departments and outsourced to help with lots of provisions, there’s only so many hours in the day. Corporate tax departments: How do you know who works in the tax departments? Drive around in January or February at the end of the night and there’s going to be the financial reporting group and then there’s going to be cars there for the three tax people that are there until two in the morning. Again, the other problem with lack of resources in my mind is, when you try to get more done with less resources is where we find control deficiencies, and that control deficiency or material weakness that gets issued is much more costly than some consulting hours or maybe even temporary employees or allocating different resources from other departments. I feel that a lot of times corporations are very shortsighted on what the actual cost of an audit failure could be [versus] the incremental cost of having enough resources and controls in place to not have that failure.
Hoffmeister: Thank you all so much for your time.
