IFRS: Managing change for the tax function

The move to International Financial Reporting Standards (IFRS) from the current Canadian Generally Accepted Accounting Principles (GAAP) will fundamentally change the way Canadian organizations report their business results. The tax function will not be immune to these changes. In fact, IFRS may affect the measurement and reporting of income taxes for financial statement purposes, the calculation of Canadian taxes payable and international tax planning, such as cash repatriation.

While the tax function will be impacted, your affected clients should also 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.

The successful management of tax affairs in a business requires a focus on all four key deliverables: tax accounting, tax compliance, tax planning and audit defence. The conversion to IFRS provides an ideal opportunity for your clients to review the tools, methodologies and skills currently used to manage tax affairs within their organization and to look to best practices in the market to optimize the effectiveness of the tax function.

Enablers required for the successful implementation of a tax strategy include the following:

Processes: Many organizations underestimate the time and resources needed to realign systems and processes during the conversion to IFRS. This is particularly true for organizations 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.

Improving data flow and the use of technology should provide lasting benefit. Since the finance function must address its data requirements for IFRS adoption, the tax function has an opportunity to join in these existing projects.

Internal controls: While processes are likely to be affected by IFRS, your clients will also need to consider the impact on internal controls and, specifically, key controls. In some cases, controls will need to be modified to reflect changes in source data or key judgments. In others, new accounting and disclosure requirements will mean that new controls will need to be designed and implemented. In either case, a focused top-down and risk-based approach will help ensure that risks are adequately mitigated in a cost-effective manner.

By conducting an early assessment of controls, your clients will benefit from a greater potential for a faster close cycle and a reduction in risk to avoid surprises.

Data: Tax departments are large consumers of data within an organization. However, they often have little input into the configuration and setup of the underlying enterprise resource planning (ERP) and/or source systems from which they obtain data. Accordingly, the tax department 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).

Since the adoption of IFRS will have direct impacts on data requirements for the finance function, organizations using older versions of financial systems may view the transition to IFRS as an impetus to upgrade. The tax department should consider its data requirements and connect with Finance and IT to determine the most effective method to source the data — and avoid a heavy reliance on spreadsheets, manual data manipulation and reconciliations to complete the deliverables.

By incorporating tax requirements in the ERP and other source designs, “tax sensitive” data, such as the defined tax requirements for intercompany transaction processes, will be captured.

Technology: Most organizations in Canada have relied upon electronic tax schedules to produce their tax accounting deliverables. However, the transition from Canadian GAAP to IFRS will require revisions to these existing spreadsheets to address differences in the computation and disclosure of taxes. As a result, your clients should take this opportunity to review the spreadsheet design and to build controls (e.g., checks, access controls, track changes) into tax spreadsheets to improve the performance of these tools. Alternatively, they can use a range of third-party tax accounting technology solutions, which will assist with the automation of the data collection.

People: The adoption of IFRS will add to the workload and pressure for staff throughout the entire organization. As a result, effective communication between the finance and tax departments is essential. To manage the conversion to IFRS effectively, your clients will need to have the right people engaged upfront — include tax staff on the IFRS tax force and involve tax staff in all IFRS training sessions. By being involved upfront, the tax staff will have a better understanding of the tax accounting standards, as well as the impact on all of the organization’s accounts, and be able to identify and address book-to-tax differences and identify implications for tax planning.

IFRS is more than a financial accounting exercise — it will affect various functions within the organization, including tax. However, it also provides an ideal opportunity to review existing tools, methodologies and skills to improve the effectiveness of the tax function. By addressing these enablers upfront in the conversion to IFRS, your clients will benefit from faster close cycles, increased communication, improved controls in tax and an opportunity to focus tax resources on proactive value-added tax planning and less on compliance.

Spence McDonnell is the Canadian Tax International Financial Reporting Standards leader for PricewaterhouseCoopers LLP. John Gotts is the Canadian Tax Function Effectiveness leader for PricewaterhouseCoopers LLP.

(06/04/09)