Search the Federal Accounting Standards Board (FASB) Web site for information about FAS 109 and you will find 14 pages of technical bulletins, accounting
pronouncements, interpretations, opinions
and assorted topics. No wonder accountants
think it is so complicated. Yet, FAS 109 can
be made easier for those who do not work
with it consistently — and, at times, for
those who do.
Satisfying FAS 109 requirements can be
simplified, especially if the parties involved
listen to one another’s concerns, work
together to boil the standard down to its nuts
and bolts, and resolve any inconsistencies
that exist in the reporting process.
Smart Business spoke to Jim Parks of
Burr, Pilger & Mayer LLP about how to
demystify FAS 109, access experts and
employ effective communications as a tool
for the tax provision process.
What is FAS 109?
FAS 109 is an accounting standard that
requires that financial statements reflect the
tax consequences of all book/tax differences. Its primary objective requires companies to recognize the amount of taxes
payable or refundable for the current year
and compute deferred income taxes for
future tax consequences of events that have
been recognized in their financial statements
or tax returns.
Why is meeting those requirements so complicated?
It doesn’t have to be. There is no doubt that
FAS 109 can be frustrating even for people
who work with it regularly. But, satisfying its
requirements lies in distilling the tax preparation process into five separate and distinct
steps for calculating tax provisions: identify
permanent and temporary differences, calculate current income tax expense, calculate
deferred income taxes, determine the need
for a valuation allowance, and record the calculations on the financial statements.
Following these steps enables someone
reasonably proficient in accounting and tax
matters to prepare a tax provision. Virtually
all tax provisions and software follow these
steps in some fashion.
How can companies navigate through the
calculations and required documentation?
One way is to follow Edmund Burke’s
advice: ‘Good order is the foundation of all
great things.’ Building on that premise means
including in the process the proper tools and
worksheet templates. But they won’t do the
trick alone. Tax preparers need a little more
to be successful! One path is to partner with
trained and experienced preparers, utilize
state-of-the-art technology and apply well-defined processes and procedures.
What benefits accrue from following that
advice?
Tax provisions prepared by experienced
personnel with the proper procedures in
place yield better results. Regarding the people process, tax provisions should be prepared by trained and qualified individuals
familiar with the local jurisdictions. The preparers could include in-house personnel and
outside professionals. It is highly recommended that personnel familiar with the
applicable jurisdiction prepare and/or have
input on a tax provision. This is particularly
important for foreign and state jurisdictions.
What role do technology and processes and
procedures play in satisfying requirements?
Adequate technology is essential to a well-prepared tax provision. Companies and their
outside accountants demand it. There are
several good software programs available to
preparers. Many companies, however, use
Excel-based programs very efficiently. A
world-class software template should be able
to address downloading of company financial statements, automatic book/tax difference updates, jurisdictional issues, currency
conversions, foreign tax credits, valuation
allowances, etc. Additionally, documentation
supporting the calculations and technical
conclusions reached should be clearly presented and understandable to the reader.
The processes and procedures applied
should be used with a high degree of integrity. Any deviation will likely produce unsatisfactory results. Through strict adherence to
the tax provision processes and procedures
companies can consistently ensure quality.
This often entails the use of checklists, flowcharts and internal and external reviews.
Should the tax preparation process be done
independently by internal personnel and
advisers?
No. Companies need significant coordination among their auditors, outside service
providers and internal personnel. Everyone
is better served if they are talking ‘on the
same page’ two to three times a year. This is
one of most important elements of the tax
preparation process. It’s also where professionals can excel and provide better services.
The tax preparation process should include
a series of meetings among the practitioners
that clearly lay out the expectations, time-lines and deliverables, and measure against
desired results. A planning meeting maps out
expectations. A post-review meeting is essential to obtain feedback, which enables everyone involved to adjust accordingly and learn.
Systemic coordination of the tax provision
process is a key element to success. It’s a
function of consistently improving upon
what works the best. And, it doesn’t hurt to
listen to what others have to say.
JIM PARKS is a tax partner with Burr, Pilger & Mayer LLP (www.bpmllp.com). Reach him at [email protected] or (408) 961-6383.
