Presentation to American Gas Association

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Tax Technology Framework

• Presentation to American Gas Association
• Monday, June 26, 2006

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Your Presenters

• Patrick Trapp
• Ernst Young
• Tax Accounting and Risk Advisory Services
• 312-879-2658
• Carolyn Bailey
• Ernst Young
• Tax Accounting and Risk Advisory Services
• Tax Performance Improvement Services
• 713-750-8652

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Agenda

• Tax Function Requirements
• Tax Technology Framework
• FAS 109 Software

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Tax Technology Framework
TAX FUNCTION REQUIREMENTS
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Growing Tax Function Demands
Todays Tax Function
Yesterdays Tax Function

• Resource Readiness
• Process Controls
• Data Systems

Jobs Act
Risk
Global
8858
SOX 404
6011
M-3
Administration
100 Resource Capacity
Examination
Administration
Provision
Examination
Provision
Planning
Planning
Compliance
Compliance
Expectations and Demands
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Tax Operations Current Requirements

• External (SEC, IRS, FASB, States, Foreign,
  Regulatory..)
• Global Tax Accounting Processes must contain
  appropriate level of internal controls
• Tax results must be supportable via a balance
  sheet approach
• Year end provision and return variances must be
  minimized, and readily explained/justified
• Material tax transactions must be transparent
  (and understandable)
• Filed returns must be audit ready
• Global tax laws and financial reporting
  regulations must be understood and appropriately
  applied to business operations tax impact must
  be communicated and reported accurately
• Other regulatory reporting requirements must be
  understood and appropriately applied to business
  operations
• Tax departments must rely on external software
  vendors to assist in meeting requirements
  additional vendors enter marketplace, tax must
  understand options and applicability

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Tax Operations Current Requirements

• Internal (Business)
• Ability to proactively provide planning and
  decision support
• Ability to assess, manage and articulate risk
  globally
• Ability to calculate, analyze, review and
  communicate global tax provision results within
  shortened close cycle
• Ability to prepare accurate tax accounting and
  cash projections at interim periods on-demand
• Ability to meet all regulatory requirements no
  surprises

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Supporting our Current Requirements
Collecting Information
Collecting Information
Using Information
Tax Adjustments Analysis
Consolidated Provision
Schedule M-1s
Regions
Data for Federal Provision
Federal Provision
Data for State Provision
State Provision
Using Information
Using and Storing
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Tax Technology Framework
TAX TECHNOLOGY FRAMEWORK An Overview
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Tax Technology Framework
USING INFORMATION (Doing Actual Tax Work)
COLLECTING INFORMATION
Source Systems
Tax Function Personnel
People Outside Tax
STORING INFORMATION

• Essentially, technologies are used by Tax
  functions for three purposes
• Collecting Information from various sources to be
  used in performing Tax activities
• Using Information to perform Tax activities
  (Planning, Fin. Reporting, Compliance, Audit
  Defense)
• Storing Information for future Tax activities
  (Planning, Fin. Reporting, Compliance, Audit
  Defense)

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Tax Technology Framework
USING INFORMATION
COLLECTING INFORMATION
Source Systems
Tax Automation
Extract, Transform, Load
Audit Defense
Tax Department Personnel
Analysis Adjustments
Tax Planning
Reporting Query
Collaboration
Portal Dashboard
Tax Accounting
People Outside Tax
Manual Data Collection
Process Management
Tax Return
STORING INFORMATION
Data Management
Document Management

• In practice
• The framework is implemented with a combination
  of non-tax and tax tools.
• A single tool may provide multiple capabilities
  (e.g., ETL Tax Accounting).
• Excel is often used for multiple capabilities.

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Collecting InformationExample Products
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Collecting InformationProcesses

• Process Considerations
• Import data directly from source systems where
  possible (rather than collecting manually).
• Use software to perform error checking and data
  transformation automatically during import.
• Use a standardized data collection package for
  data that cannot be directly imported.
• Use standardized reports to reconcile imported
  data back to the financials this audit trail
  shows that tax calculations begin with the
  correct book numbers.
• If necessary, reconcile to the financial
  consolidation system for on-the-top adjustments.
• Store the data collection packages and import
  reconciliation reports in a document repository
  to preserve the audit trail.
• Store mapping rules and transformations in a data
  repository to complete the audit trail.

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Automating Adjustments CalculationsExample
Products -- Income Tax
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Automation Analysis Income Tax

• Process Considerations
• Aim for high automation properly defined rules
  can automate over 70 of M-1s for most clients
  this reduces manual time spent on mechanical
  calculations.
• Trial balances, tax adjustments, reclasses, and
  tax calculations should be stored in a data
  repository for use in provision, tax return, and
  tax planning.
• Manual adjustments, calculations, and analyses
  should have detailed supporting workpapers and
  schedules stored in a document repository to
  maintain an audit trail.

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Reporting DisclosingExample Products
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Reporting DisclosingExample Products
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Reporting Disclosing Processes Income Tax

• Process Considerations
• Use appropriate provision software
• The provision process should support a cumulative
  build of actual G/L data during the year so that
  yearend provision and yearend tax returns are
  based on same process and data. (Note APB 28
  requires quarterly provisions to be based on
  forecasted annual amounts.)
• Provision data should be the starting point for
  estimated payments, extensions, and returns
• Therefore, either use a provision tool that can
  export to tax return software or (ideally) store
  the provision data in a separate data repository
  so that it can be reused.
• Tax basis balance sheet and other analyses of
  impact on deferred taxes, NOLs, and credits
  should be prepared concurrently with the
  provision.
• When designing processes or implementing tax
  provision or return software,
• always look at the bigger picture
• what other processes are related and how will
  they share and reuse this data?

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Tax Technology Framework
TAX PROVISION SOFTWARE Using Information
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Improving the Tax Provision What Companies Want
..
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Improving the Tax Provision What Companies Can
Have ..

• Technical Accuracy
• Streamlined / Automated
• Integrated Processes
• Global Visibility and Consistency
• Internal Controls

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Moving to Future State
Foreign Provision
Data Collection Clean-up
Provision Calculation

• Data
• Management
• Tool
• Clean up
• Exploit
• Manage
• Storage

• Baseline Income Tax Process
• Global FAS 109 Provision Calculation
• Federal Estimates
• State Estimates
• Tax Forecasting

Tax adj Analysis
Consolidated Provision
Schedule M-1s
Tax Adjustments Analysis
Regions
Data for Federal Provision
Federal Provision
Data for State Provision
State Provision
Other Inputs
Compliance
Business Tax Forecasts
NOL Tracking
Reserve Tracking
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FAS 109 Software A potential Baseline platform

• Potential Components of FAS 109 Software
• Book to Taxable Income Reconciliation
• Automation of Schedule M-1s
• Provision Output
• Effective Tax Rate
• Current Deferred
• Journal entry footnote
• Compliance Linkage
• Estimates and Extensions
• Return how far can it go
• Provision to Return Reconciliation
• Global data collection provision calculations
• Determine Key Requirements and evaluate the
  technology tool first based on how it handles the
  Baseline
• Are we willing to customize the tool if it does
  not meet the Baseline requirements.

Effective Tax Rate
Current Deferred
JE Footnote
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FAS 109 Software The Baseline

• Effective Tax Rate
• State Tax
• Interim Calculation
• Permanent Items

Effective Tax Rate
Current Deferred
JE Footnote
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FAS 109 Software The Baseline

• Current Deferred
• Temporary Differences
• Tax Basis Balance Sheet
• Net Operating Losses
• Tax Credits

Effective Tax Rate
Current Deferred
JE Footnote
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FAS 109 Software The Baseline

• Journal Entry Footnote
• Journal Entry Generation
• Deferred Tax Rollforward Categories
• Footnote Reports

Effective Tax Rate
Current Deferred
JE Footnote
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FAS 109 Software A History

• Understanding the history of a FAS 109 software
  tool may assist in determining its strengths and
  weaknesses
• FAS 109 software evolves over time, it is
  beneficial to understand a vendors approach to
  change and how they want to be defined in the
  marketplace

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FAS 109 Software Considerations

• Data Collection Mapping
• How will the tool work with your source systems
  (e.g. General Ledger, Fixed Asset System, etc).
• How difficult is it to import data (e.g. book
  income, tax accounts, etc.) into the tool?
• Is there proper IT support available to Tax to
  build the source system data feeds (e.g. book
  income, tax accounts, fixed asset system, ect.)?
• Do you want to bring in a full trial balance or
  just Book Income for each company? Can the tool
  support either one?
• Is the source system data clean or messy?
• Does it provide a working space for data
  cleansing?
• Is account mapping functionality needed due to
  multiple general ledger systems?
• Provision and return software generally support
  account mapping however, they may have limited
  ability to map multiple charts of G/L accounts.
• Some Tax tools can support multiple charts of G/L
  accounts inbound and outbound (e.g., booking
  journal entries to multiple entities and charts
  of accounts).
• Account mapping can be built with generic ETL
  tools, but may require more effort to set up.
• Does the tool have a data collect tool for the
  foreign locations?

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FAS 109 Software Considerations Cont.

• Entity and Roll-up Information
• How does the tool handle the different types of
  entities (e.g. Partnerships, Joint Ventures,
  Branches, etc.)
• How does it account for ownership of
  Partnerships and/or Joint Ventures?
• How does the tool handle the different roll-up
  levels for book and tax (e.g. legal entity,
  business unit, filing groups, consolidated
  groups, etc.)
• Automated Adjustments
• What level of schedule m automation is desired or
  can be achieved?
• How robust is the tools rules-based automation
  functionality.
• Most provision and return software generally
  supports automating book-tax adjustments. Some
  however, are more robust than others.
• Tax Calculations and Manual Adjustments
• Complex tax calculations few or many?
• Will the tool handle these calculations? How many
  additional working spaces will I need to create?
  How will these integrate into the baseline tool?
• How does the tool handle the basic Federal,
  State, and Foreign calculations?
• Does the tool allow for Managing NOLs and
  Credits?

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FAS 109 Software Considerations Cont.

• Reporting Disclosure
• Journal entry requirements at what level of
  detail? Frequency? Will the tool handle the
  generation of journal entries? How difficult will
  it be to automate journal entry generation?
• What Standard reports are available? How
  difficult is it to add reports?
• What type of Ad-hoc reporting is available?
• Does it provide a tax basis balance sheet and
  Footnote Report?
• Integration Requirements
• Will the tool handle the level of integration we
  want to achieve? How will it do this?
• IT Support
• How much IT support does the tool require?

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FAS 109 Software Whats Available?
Standalone
Standalone
Compliance
Compliance
Specialty/Custom

• Please Note
• This list represents several but not all of the
  available provision tools in the market.
• Ernst Young does not endorse or sell any of
  these products.

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Critical Success Factors

• Focus on the provision process, not the tool
• Identify and analyze the root cause of issues
  and concerns (People, Process, Technology,
  Environment)
• Prioritize and define strategy and timing for
  resolving these issues
• Recognize that the tool will not do it all some
  calculations may still be performed offline
• Start with good, clean information (deferreds,
  etc.) before implementation
• Integrate as much as possible with the compliance
  / reporting process
• Obtain cooperation from IT for data requirements
  and system extracts
• Allowing timing for parallel of process at
  least one but preferably two quarters
• Allocate the time / resources to get it done!