Date posted: 17/09/2019 5 min read

Tackling the tricky areas of tax-effect accounting and consolidations

Tax effect accounting and consolidated accounts are complex areas of accounting. How can tax professionals better manage the challenges these areas present?

In Brief

  • Complexity in tax-effect accounting and consolidations can present a challenge for many corporate accounting professionals
  • Complexity can be managed by robust processes
  • Accountants will always be valued for their ability to exercise sound judgement and provide strategic counsel

When Tony Lyle arrived in New Zealand ten years ago, the corporate tax environment was in flux. A number of high-profile tax avoidance cases were facing court - which saw corporations change their attitude towards tax and compliance, paving the way for how corporate tax is handled today.

We speak with Tony Lyle CA, Partner at PwC, about his strategies for successful management of complexity in tax-effect accounting, as well as best practices for preparing consolidated accounts.

The challenges of complexity

A principal source of complexity in preparation of consolidated accounts is the overlay of tax and accounting principles. This can double the regulations and standards that organisations need to comply with and Tony is familiar with the challenge of navigating multiple layers of compliance.

"There is tax legislation, which is a couple of thick books. This is overlaid by accounting standards, which are also thick books. The challenge is negotiating this, and you need to ask questions like 'What's the tax position that's being considered, and what's the appropriate outcome in the accounting standards?' Making sense of it all can be quite complicated," Tony says.

Tony says the sheer complexity of these processes and requirements creates common problem areas most corporate tax accountants and financial statement preparers are familiar with.

"Because it's so complex, there are often mechanical mistakes in the way you put together your calculations or work papers, for example. An additional element is time pressure. Often the work that's done for financial statements on tax is the last piece of the puzzle, and people are waiting on you before being able to publish the statement. This increases risk," he says.

"Complexity will always exist, but there are ways to manage it. For example, to reduce time pressure, one of the first things I always help my clients with, is building a greater time buffer into their tax accounting process."
Tony Lyle CA, Partner at PwC.

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Interpretation to suit different audiences

When it comes to the preparation of consolidated accounts, Tony says it's important for financial statement preparers to remember that they'll be engaging with two distinct audiences. Understanding how to interpret and produce relevant information for each audience is of vital importance.

"There's the revenue authorities. Ultimately, they're interested in what the cash outcomes are of different tax positions. They think about 'What are our cash flows that result from tax various positions and transactions?'" Tony says.

However, the investors' focus is on financial statement positions, which outline profit, loss and balance sheet outcomes.

"They don't just look at immediate financial positions either, they want financial statements to show longer-term prospects based on tax positions that are being taken," Tony says.

For Tony , this is a process of extrapolation that requires a mixture of interpretations to produce meaningful information from various tax position outcomes.

Liberation from complexity through robust processes

Tony will share some strategies to manage the challenges of complexity during his session at the NZ Accounting Conference in November. He believes with the right knowledge many risks can be mitigated.

For Tony , having clear processes and the right people at the helm are two of the most effective strategies for managing complexity.

"As an organisation, it's crucial to have processes that are understood, with clearly defined responsibilities, and the right tools in place - as well as a structure that allows multiple levels of review," Tony explains.

"If you have these elements well established, you can begin iterative improvement by asking 'What can we do to simplify or automate this? What tools or products are on the market that we can adopt?'."

Tony believes preparers of deferred tax reconciliations and consolidated financial statements will always need to exercise sound judgement, particularly when it comes to new legislation or information disclosure.

"Judgement is incredibly important, after all we're talking complex areas where both accounting and tax outcomes aren't always known," he says.

"Interpreting a new piece of legislation requires sound judgement, as does predicting how an authority might apply it. Or, for example, if there's an inquiry into a position by a revenue authority, sound judgement is required to make sure the right numbers are being reported appropriately."

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