IFRS: Managing Change for the Tax Function

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The adoption of International Financial Reporting Standards (IFRS) is being discussed at Board of Directors meetings and senior executive meetings for all publicly accountable entities in Canada and most multinational companies. We expect that the adoption of IFRS will pose a significant management challenge for many organizations, since in most cases, it will require changes to the underlying financial data and require increased disclosure in financial reporting. The tax function will not be immune from these changes; in fact, IFRS may impact how a company measures and reports pre-tax income which is the foundation for tax computations. The impact of the adoption on tax accounting is quite obvious; however, management must also address the impact of the adoption on the remaining tax function deliverables - tax compliance, tax planning and audit defense.

We encourage management to consider the opportunities presented by the transition to IFRS to drive value added change in the tax function and adopt best in class practices at the outset. In this article, we outline several practical ideas for management to consider. We have framed our comments in the context of the PricewaterhouseCoopers Tax Function Effectiveness framework, which was established to address how a tax function should operate. The framework considers the tax function in terms of four key deliverables which are required for the successful management of the tax affairs of a business – tax accounting, tax compliance, tax planning, and audit defense. The framework assesses those deliverables in the context of seven enablers (i.e., people, process, technology, data, controls, strategy and structure) which represent the tools, methodologies and skills required for the successful implementation of the tax strategy.

While each of these ideas can be implemented absent the adoption of IFRS, we believe that IFRS provides an excellent impetus for change.

1. Processes

We expect that the processes around each of these deliverables will be impacted by the adoption of IFRS. The extent of the impact will vary for each organization and deliverable; however, it is important to identify changes early to plan accordingly and avoid surprises. As a result, we suggest that all tax processes be reviewed. Our experience suggests that most companies underestimate the time and resources needed to realign systems and processes. This is particularly true for companies with existing management systems or legacy systems from historical acquisitions that have not been integrated and are not geared to provide sufficient or appropriate data for the new and increased disclosure requirements.

Since process changes are inevitable, we encourage management to take this opportunity to seek improvements to current processes by looking to best in class practices in the market to optimize the effectiveness of the tax function. In this regard, improving data flow and the use of technology should provide lasting benefit. Since the finance function must address its data requirements for the IFRS adoption, the tax function has an opportunity to join existing projects.

2. Internal Controls

As noted above, we expect that the adoption of IFRS will impact many processes within the tax function. Inevitably, this will require that management consider the impact on internal controls and, specifically, its key controls.

This will provide management with an opportunity to address key controls in the tax function and potentially improve the overall control environment. Two key benefits associated with an early assessment of processes and controls is the potential for a faster close cycle and a reduction in risk (i.e., no surprises).

3. Data

Tax departments are large consumers of data within an organization; however, they often have little input into the configuration and set-up of the underlying ERP and/or source systems from which they obtain data. Accordingly, tax frequently struggles to obtain data at the appropriate reporting level (e.g., legal entity, tax jurisdiction) and at the correct level of detail (e.g., transaction level). Unfortunately, this usually leads to a heavy reliance on spreadsheets and manual data manipulation as well as unnecessary reconciliations. Ultimately, this can lead to an overall lack of confidence in the quality (e.g., accuracy, completeness, validity) of information.

The adoption of IFRS will directly impact data requirements for the finance function. We expect that this will cause many finance functions to initiate projects to reconfigure ERP and/or source systems to address their IFRS requirements. It is reasonable to expect that most financial systems already in use by large organization will handle the multi-GAAP reporting; however, we expect that organizations using older versions may view the transition to IFRS as an impetus to upgrade. Regardless of the extent of change, we encourage tax to consider its data requirements and connect with finance and IT to determine the most effective method to source the data. If not addressed, the adoption of IFRS may lead to a heavier reliance on spreadsheets, manual data manipulation and reconciliations to complete the deliverables.

To facilitate the request for assistance from the finance and IT departments, we suggest that tax produce a list of data requirements. We recommend that the list of tax data requirements be as detailed and thorough as possible. This approach can help to realize two key benefits. The first is that it will clearly communicate to the finance and IT teams what data is required by tax and will permit them to understand and address the needs of tax. The second benefit of this exercise is that it will require the tax team to consider each process and address and communicate the exact data required to complete its deliverables.

As noted above, finance staff will need to work with IT to adapt the accounting systems to capture and report the data that is required to adopt IFRS. We suggest that management take this opportunity to co-ordinate the finance, tax and IT teams to incorporate the tax requirements into the ERP and other source system designs. This will allow for the capture of “tax sensitive” data, such as:

  • Aligning entity structure with the ERP to allow tax to obtain pre-tax book income by legal entity as well as adjusted legal entity trial balance information for tax accounting and compliance;
  • Chart of accounts to provide an appropriate level of detail and tax attributes for each transaction to enhance automation of book-to-tax differences;
  • Configuring ERP fixed asset modules to provide appropriate reporting (e.g., defining asset classes, useful lives, defining tax requirements for the capture of capital asset information for tax);
  • Defining tax requirements for capturing revenues and expenses at the appropriate jurisdictional level for allocations; and
  • Defining tax requirements for intercompany transaction processing.

We believe that automation for tax data collection can result in significant benefits for the company including faster close cycles, improved controls and higher quality data to name a few. Senior executives should ask themselves what if senior tax staff had the time and resources available to focus on value added tax planning.

4. Technology

Most organizations in Canada have relied upon electronic tax schedules (usually excel based) to produce their tax accounting deliverables. The transition from Canadian GAAP to IFRS will require revisions to these existing spreadsheets to address differences in the computation and disclosure of taxes. The focus on internal controls in recent years highlighted the inherent risk of spreadsheets and the prevalence of errors. Accordingly, we suggest that management take this opportunity to review the spreadsheet design and build controls (e.g., checks, access controls, track changes) into tax spreadsheets to improve the performance of these tools.

As an alternative to traditional spreadsheets, the adoption of IFRS will open Canadian companies to a range of 3rd party tax accounting technology solutions. The use and quality of these solutions has increased in recent years. Most solutions assist with the automation of the data collection process and can be used to support the tax compliance process and ultimately, audit defense. In the correct circumstances, automation and the use of technology solutions can help to achieve benefits such as higher staff retention, improved quality of information, enhanced knowledge sharing and strengthened internal controls.

We encourage management to take this opportunity to address the use of technology within the tax function (whether developed internally or acquired).

5. People

The key to all effective change is people. The adoption of IFRS will add to the work load and pressure for staff throughout the organization, including the tax department. This is likely to strain tax functions which, in many cases, already are resource constrained. Implementing one or more of the suggestions noted above may assist management to manage the change effectively.

A common concern raised by management is that tax and finance do not communicate effectively. In extreme cases, relations between staff in the two functions can be cordial at best. Effective communication between finance and tax is essential for an effective and efficient transition to IFRS. The adoption of IFRS can present an opportunity to improve relationships and lines of communication. One opportunity is to include tax staff on the IFRS task force. In addition to providing opportunities to develop relationships, it is a best practice to involve a cross specialty team to ensure that various perspectives are considered. Another opportunity is to involve tax staff in all IFRS training sessions. Again, this serves a dual purpose. In addition to understanding the tax accounting standards, the tax staff will need to understand the impact on all of the organization’s accounts to identify and address book-to-tax differences and identify implications for tax planning. Given the current demand for tax resources, it is important for tax executives to invest in people to ensure that the tax function is prepared to meet the challenges presented by a conversion to IFRS.

Taking advantage of some or all of the opportunities noted above should help to alleviate some of this pressure in the short and long term and provide long term benefits.

Financial reporting in Canada and throughout most of the world is going through significant change and, as noted above, it is more than a financial accounting exercise. The transition to IFRS will have a pervasive impact on organizations. We encourage management to take this opportunity to drive positive change in the tax function and influence the outcome to its advantage. The potential benefits of these actions are numerous and include faster close cycles, reduced overtime, higher morale, improved communication, improved controls in tax and an opportunity to focus tax resources on proactive value-added tax planning and less on compliance.