FASB 109
http://www.nysscpa.org/cpajournal/2006/706/essentials/p38.htm
Another significant material weakness found among accelerated filers was inadequate documentation of tax-effected cumulative book and tax temporary differences. In addition, processes and controls over analyzing and establishing valuation allowances and contingency reserves were also found to be inadequately documented.
Many tax departments would use ad hoc, nonstandardized spreadsheets to compute tax provisions and deferred tax amounts for year-end financial statement reporting.
Tax departments were able to take this spreadsheet estimate/true-up approach because they often maintained “free” or “unallocated” reserve amounts in their contingent tax liabilities that they could increase or decrease to meet the estimated tax provision calculated for financial statement purposes.
Such practices can no longer be used in a SOX section 404 context. Tax departments must identify the specific tax exposures that the contingency reserves are meant to cover. The tax department’s view of the company’s exposures must be documented and supported by a detailed legal analysis.
Best Practices
Ernst & Young reports that successful accelerated filers were proactive in their approach to these issues by providing early training to their tax staff, especially with respect to following SFAS 109; supporting deferred tax balances with tax-basis balance sheets and other supporting calculations; and using tax-provision software and other support tools.
http://www.deloitte.com/dtt/section_node/0,1042,sid%253D16185,00.html
Four steps to an effective tax risk management methodology
Through proper communication and alignment between the corporate tax department, the business units, and management, tax risk can be appropriately considered and managed through these four steps:
- Risk identification and assessment, through which every aspect of the business is examined with a specific eye towards tax risks
- Risk reduction, through which management and Boards develop controls to mitigate risks and provide indicators of when it might arise
- Ongoing execution, during which risk owners are identified within different groups to coordinate and improve risk strategy, processes, and measures
- Tax risk policy and strategy, through which formal policies are established to set the "tone from the top", the tax risk threshold for the organization, and to facilitate and communicate future tax planning opportunities.
