Amit Tekwani
Managing Director and Financial Reporting Practice Leader
articleClient Story
Automating Stock Compensation Tax Reporting for a Biopharmaceutical Company
PharmaCo is an American biopharmaceutical company with subsidiaries all over the world. The company has a rather complex stock-based compensation system that involves options, restricted stock units, performance-based awards, and an employee stock purchase plan.
Background
Sometimes, corporate accounting and tax departments have different aims when it comes to automating the financial reporting process for stock compensation. This was the case at PharmaCo. Although the controller believed it was more important to automate other facets of stock compensation reporting, the tax director believed that automating her process was the greater priority.
We soon grasped the tax director’s sense of urgency. Getting a useable tax report out of PharmaCo’s administration system took a significant amount of manual work and on-top adjustments. What’s more, completing it in a timely manner required highly simplistic assumptions for handling cost sharing and international recharge agreements, IFRS reporting, and IFRS statutory reporting. And all this took place at the expense of improving forecasting, data analytics, and process controls.
The Challenge
More specifically, the tax reporting for share-based payment awards required the finance team to:
- Manually consolidate their existing application’s many report extracts into one useable tax report
- Cope with limitations in Excel that made it nearly impossible to handle ad-hoc reporting and changes that arose over time. Post-dated activity, custom recharge provisions, cost sharing arrangements, unplanned on-top adjustments to expense made by corporate accounting, and more all led to a constantly growing and unmanageable series of spreadsheets.
- Forecast future tax settlements plus earnings and effective tax rate implications in future periods. A push for more granular, scenario-based tax settlement forecasting led to additional complications. For instance, at PharmaCo the APIC pool’s elimination in ASU 2016-09 introduced far more complexity than it removed.
Moreover, in the course of just one year, PharmaCo acquired two companies and chose to assume the awards held by employees at each. This required rapid retrofitting of the existing tax accounting model to handle nuances in the ASC 805 accounting framework. The acquisition reporting requirements brought the company’s manual tax reporting process to the brink of collapse.
A Search for Alternatives
Initially, PharmaCo’s tax team enlisted a public accounting firm to help them form tax-related journal entries and provision calculations for stock-based compensation. But the accounting firm’s process was relatively manual, took weeks to run, and still required manual processing by PharmaCo. Tax forecasting remained weak and turnaround times were too lengthy given PharmaCo’s accelerated quarter-close calendar.
Equity Methods Provides a Solution
PharmaCo’s tax director became aware of Equity Methods through a colleague at a previous employer.
The Equity Methods engagement team quickly understood the company’s awards, data structures, and requirements. Thanks to our large base of clients, we can tap extensive experience in working with all plan administration systems and granting strategies.
After completing discovery, we designed and built a process and report template specific to the company’s needs. Next, we automated the entire process using powerful SAS technology, which enables fast turnaround times, automated controls, and considerable customization. The use of professionally-designed algorithms allows us to conduct an annual SOC 1 audit through a Big Four accounting firm.
The custom process met all of PharmaCo’s needs, from developing journal entries to validating the cumulative deferred tax balance to forecasting tax settlement events across multiple scenarios. Beyond that, we created custom reviews and tie-out reports that reduced the time that our client’s tax team needed to spend on reconciliation.
Equity Methods Achieves Impact
Today, PharmaCo has an upgraded, fully-automated tax reporting process capable of handling their assumed awards. Built-in checks spot errors and inconsistencies in the data while automatically reconciling expense and tax calculations. The dynamic report can immediately adjust to different tax rate assumptions and on-top adjustments.
Meanwhile, we keep a permanent, tranche-level record of transactions, expense, and related deferred tax assets (DTAs) so that post-cutoff activities can be handled correctly in the DTA balance roll-forward. Besides the quarterly tax report, we also provide a quarterly forecast excess tax benefit report to help with the tax team’s planning.
The result? Greater accuracy, dramatically reduced turnaround time, and a tax team free to spend more time on higher-value activities.
contact usThe Experts
Raenelle James
Managing Director, Financial Reporting Services
Daniel Hunninghake, CPA
Managing Director, Financial Reporting Services
