Meticulous Records, Professional Accounting Offer Help Ahead of Proposed Tax Law Changes: Preparing for efficient year-end closeout processes.
Year-end--the closing adjustment period of a company's accounting year--is important because it generates financial statements that will be used for tax preparation, future reference, and critical decision making. And if businesses take the time and necessary steps to ensure their year-end accounting is properly completed, they can step into 2018 with reliable balances and peace of mind.
Preparing for an Internal Closeout
Year-end procedures for businesses involve two phases. The first phase takes place before year-end and typically includes year-end tax planning and preparation for an orderly closing of the books. "For very active businesses, tax planning is often the primary motivator for getting the accounting in good enough shape to estimate net income for the year and to do it early enough to allow for implementing late-year tax planning strategies," says Gerald Haugeberg, managing partner of Cook & Haugeberg of Fairbanks. "Management is usually very involved in this aspect of the work, so you have the advantage of their direct participation."
The second phase of year-end preparation happens after the year has closed. This next step in the process entails adjusting and reconciling accounting records to give to outside accountants for tax return and/or financial statement preparation. All of the asset and liability accounts should be reviewed and reconciled or adjusted, as needed, to ensure ending balances are shown correctly.
The amount of year-end work actually conducted by the business, as opposed to an outside accountant or tax preparer, varies considerably. In general, a company's internal accounting capability depends on the background and experience of its people, Haugeberg says. For instance, a small operation may only be able to maintain some form of electronic check register. "In cases like that, the outside accountant is expected to provide the year-end accounting necessary to get the records ready for a tax return," Haugeberg says. "In other cases, the company may have a well-staffed, experienced accounting group fully capable of getting the year-end accounting ready for tax return preparation."
When closing out the books internally, the company's in-house accountant should review the preliminary year-end balance sheet closely, Haugeberg says. All accounts with third-party statements, such as bank accounts, loan balances, and credit card balances, should be reconciled with the statements and adjusted as necessary. The review should also look for anything that seems unusual. "Any balance that hasn't changed from last year should be investigated if the reason is not obvious on the surface," he says. "Inventory balances should be adjusted to the physical inventory count or perpetual inventory records. Depreciation should be calculated and recorded."
Haugeberg points out that the type of business and its specific accounting needs determine what the basic year-end procedures should be and what priority specific accounts should be given. For example, a retail business selling merchandise will be oriented toward inventory and inventory control, sales and cost of goods sold, and other accounts directly related to the selling process. A service business may be more focused on the billing and collection cycles. And construction contractors will want their job cost records to be as complete and as accurate as practical. "Most businesses share common accounting issues with some degree of complexity, but the relevance will depend on the importance of them to the specific business," he says.
It's a good idea for companies to take the time to review their prior-year tax documents, says Joseph Moore, CPA, principal of Altman Rogers & Co., which has offices in Anchorage, Juneau, and Soldotna, because there may have been unexpected issues that arose last year that will likely come up again during the current year.
The accounting staff for the business should begin to hone in on the usual time-consuming reconciliations that will be needed for year-end. New activities, asset acquisitions or dispositions, and ownership changes should all be documented. "Preparing a current set of financial statements and a list of non-recurring items and questions, along with scheduling a meeting with your CPA early in the fourth quarter, is highly recommended," he says.
Moore says that he doesn't see the need for companies to take any special steps at year-end as long as their in-house accounting staff have adequate accounting skills and are comfortable reaching out for assistance if needed. "If the year-end tax return or financial statements are ultimately prepared by a CPA, the CPA will perform procedures to confirm that the year-end close out was or will be done correctly," he says. "It's not rare for additional adjustments to be made and given to the client post-closing."
BDO Tax Partner Chad Estes, CPA, says recording all the transactions is a good place to start when preparing for an internal close-out of the books. And if businesses have done monthly or at least quarterly closes, it makes year-end much simpler. "You have fewer transactions to deal with," he says. "You've got a lot of your work already done for you."
Once the accounting staff ensures all transactions are recorded and obtains year-end balances from third parties, it's time to perform a two-year comparison. The goal is to see if everything lines up, something Estes calls the "Make Sense" test. "It's a great way to see if things look like they should," he says. "If they don't, you've got a red flag, and you need to dig a little bit."
The two-year books comparison is essential. And it's vital that if conducted internally, there is a second set of eyes--such as a manager or business owner--available to facilitate the process. "The business owners know their business the best," he says.
For some companies, another step in the year-end close-out is to take inventory. Businesses must count or measure items such as property, goods in stock, and building contents to fully reconcile their year-end accounts.
Prepping to Close Using an Outside Accountant
When an outside accounting firm is involved with closing out the books at year-end, Estes says, communication is a fundamental requirement. The CPA firm needs to know the client's deadline for completing everything, and this deadline must be made clear early in the process--at least thirty days in advance of the due date. "We want to start reaching out to make sure they have everything scheduled to ensure we can take care of them in the proper manner," he says. "Obviously, the more lead [time] we can get the better."
The accounting firm requires the same third-party documents used by the company when it closes out internally; these documents include credit card statements, bank statements, loan statements, and inventory sheets. The best and preferred way to obtain this kind of information from clients is electronically, Estes says. "In this day and age, there are lots of secure file exchanges and portals where you can upload things securely," he says. "Or they can bring in hard copies, and we'll convert them to electronic data. Having all the documents and getting them to us in a timely manner is key."
When companies outsource or delegate year-end closing to a third party, it's a totally different ball game, says Shane Baird, CPA. "[Contractors] will want good information in order for them to do what they have been delegated to do," says Baird, a director (partner) in training with Anchorage-based Thomas, Head & Greisen. "There will be user controls that they will expect the business to do."
Clients of outside accounting firms can delegate as much of the year-end closeout process as they want, but they can never delegate their responsibilities. "You still have a fiduciary responsibility to monitor and oversight those," he says.
Therefore, clients should conduct an evaluation of the services and processes involved to ensure their needs are being addressed. "The client is still responsible for year-end reporting, it's just now the roles and goals have changed," Baird says. "Instead of being a preparer, they are more of a reviewer."
Baird says that before outsourcing year-end preparation, clients should properly vet any potential outside accounting firm by requesting references, scrutinizing the company's reputation, and considering whether the firm has a history of providing high quality services.
Other Important Strategies
Whether businesses close out their books with an in-house or third-party accountant, there are some general strategies they can apply to make the process easier.
For example, Baird recommends that companies get all the facts and circumstances and maintain adequate documentation for all of their transactions. "Each transaction is a tax position that is subject to an audit or other scrutiny," he says. "As CPAs, we tend to be on the conservative side. We want to make sure that all their tax positions are substantiated and defendable."
People need to gain access to real-time information, online accounts, online statements, and to possess the ability to work within the cloud, Baird says. If companies want to stay on the cutting edge, they need to jump on board with technology. "Become paperless," Baird says. "There's no need for treasure hunting for documents. When you're paperless, it's all in one spot."
Baird also emphasizes the need for timely and clean closeouts. He encourages businesses to have good systems, a good team, start early, and be proactive. "Consult with professionals," he says. "If you consult with your CPA quarterly, there will be less surprises, everybody will be on the same page, and it will make everything more efficient and smooth."
Estes also urges companies to use technology to their benefit. For example, small businesses can use QuickBooks and other tools that will self-populate transactions. This can speed up closings, making the whole process easier.
It's also important for businesses to use good descriptions when recording items. For instance, instead of listing a purchase as simply "equipment," they could describe it as "a Ford 150 truck." Estes says: "You should take the time when you're recording transactions throughout the year to provide enough information for the future. Then you don't have to remember what you did eleven months ago."
Haugeberg encourages companies to do as much as they can in-house to prepare for year-end accounting. This way, they can review the preliminary trial balance for accounts that need adjustment or just look wrong on the surface. "Company personnel and management can spot problems quickly if they have the time to give it a good look," he says.
While they should do what they can in-house, businesses should also know their limits. "In many cases, the added fees for professional help with year-end accounting is less expensive than the added salary cost of more qualified company personnel would be," Haugeberg says.
Moore, like Baird, also advocates getting an early start on year-end preparations. Businesses need to give themselves enough time to accomplish what needs to be done to get fully prepared. "Depending on the size of the business and its number of locations, plenty of time should be allotted for year-end work," he says.
Allowing ample time for year-end preparation is especially important given some of the tax law changes and tax filing deadlines. This year, for instance, tighter filing deadlines are still in effect that enable pass-through entities to file and report tax information prior to the owners' filing deadlines. The Section 179 expensing of capital assets ($500,000 limit) was made permanent in 2015. And bonus depreciation, which allows businesses to claim additional first-year depreciation, remains in place until 2019 with phase out provisions.
Also, as of October, the White House and Congress began touting significant tax law changes. According to Moore, crucial changes could affect small business tax rates, a repatriation tax holiday for US companies, the immediate expensing of a business investment, and the repeal of the alternative minimum tax. "Any change to the tax law will require cooperation from both the White House and Congress," he says. "Stay tuned, as any changes could also be retroactive until the beginning of the year."
By Tracy Barbour
Tracy Barbour is a former Alaskan.
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|Title Annotation:||FINANCIAL SERVICES|
|Comment:||Meticulous Records, Professional Accounting Offer Help Ahead of Proposed Tax Law Changes: Preparing for efficient year-end closeout processes.(FINANCIAL SERVICES)|
|Publication:||Alaska Business Monthly|
|Date:||Dec 1, 2017|
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