Valuation Method for Aging Tax Debts
2006 MSATA Presentation By:Jeff Scott, Executive Director of Compliance Enforcement
Andrew Kapp, Accounts Receivable Manager
Net Realizable Value
Kansas Department of Revenue
What is NRV?• Simply, NRV is predictive statistics.
– A statistical probability of debt recovery based on each debt’s unique combination of variables or characteristics.
• Probabilities are used to determine a realizable realizable valuevalue of an inventory over a defined period of time.
• NetNet... bankruptcy and bad debts are not included.
Net Realizable Value Net Realizable Value (NRV) (NRV)
• Building Valuation Models– KDOR’s Approach
– Valuation Flow & Coding Scales
– Valuation Example
• Application Technique– Report Examples
– Other Uses For Models
• Discussion & Questions
Topic Outline Topic Outline
NRV ConsiderationsNRV Considerations
• Method– Judgmental or
Empirical (Statistical)
– Continuous or Incremental
• GAAP (Reporting)• Model Application
– Data Warehouse
– Reporting Software
• Valuation Components– Tax Type
– Age
– Amount
– Filing Frequency
– Debt Source
– Physical Location
– Customer Profile
– Business Type
– Etc...
KDOR’s NRVKDOR’s NRV
• Method– Judgmental or
Empirical (Statistical)
– Continuous or Incremental
• GAAP (Reporting)• Model Application
– Data Warehouse
– Reporting Software
• Valuation Components– Tax Type
– Age
– Amount
– Filing Frequency
– Debt Source
– Physical Location
– Customer Profile
– Business Type
– Etc...
Building Probability Models• Five years of historical data is extracted from
KDOR’s collection system. • Extracted data is sent through a custom analyst
process (data warehouse environment). • Each debt is coded according to it’s components. • Debts are compared to collection(s).• File is created describing incremental collections of
each unique combination of debt components.
Debt Valuation Debt Valuation Modeling Process Modeling Process
Process Illustration
Modeling Process Modeling Process
DataExtracted
FromSy stem
FileTransf erred
to DataWarehouse
DataComponents
Analy zed
Component 1:Tax Ty pe
Component 2:Collection Age
Component 3:Collection Amt
Component 4:Debt Source
ValuationOutput File
Created
Analy sis RulesAssigned
Partial recovery is included.
Process Illustration
Modeling Process Modeling Process Tax Type
Individual IncomeEmployers' WithholdingRetailers' SalesCorporate Income
Debt AmtBetween $5 and $50Between $50 and $100Between $101 and $200Between $200 and $300
Debt AgeMore than 0 days More than 30 days More than 60 days More than 90 days
Debt SourceAssessed Tax Liability Non-Assessed Liability
ID Tax Type Debt Amt Debt Age Assessed1 Retailers' Sales $140 24 N2 Individual Income $194 72 N3 Employers' Withholding $100 40 Y
Valuation File
Historical Debt File
Debt Components
Valuation File
Valuation File - Report View
Valuation File Valuation File
Tax Type Debt Amt Debt AgeDebt
SourceCumulative Recovery
Incremental Recovery
Individual Income Between $5 and $50 More than 0 days N 84% 21%More than 30 days N 63% 21%More than 60 days N 42% 16%More than 90 days N 26% 26%
Between $5 and $50 More than 0 days Y 44% 21%More than 30 days Y 23% 17%More than 60 days Y 6% 5%More than 90 days Y 1% 1%
Individual Income Between $50 and $100 More than 0 days N 91% 14%More than 30 days N 77% 31%More than 60 days N 46% 24%More than 90 days N 22% 22%
Between $50 and $100 More than 0 days Y 32% 14%More than 30 days Y 18% 7%More than 60 days Y 11% 5%More than 90 days Y 6% 6%
Alternative Use of Valuation File
Valuation File Valuation File
Tax Type Debt Amt Debt AgeDebt
SourceCumulative Recovery
Incremental Recovery
Individual Income Between $5 and $50 More than 0 days N 84% 21%More than 30 days N 63% 21%More than 60 days N 42% 16%More than 90 days N 26% 26%
Between $5 and $50 More than 0 days Y 44% 21%More than 30 days Y 23% 17%More than 60 days Y 6% 5%More than 90 days Y 1% 1%
Individual Income Between $50 and $100 More than 0 days N 91% 14%More than 30 days N 77% 31%More than 60 days N 46% 24%More than 90 days N 22% 22%
Between $50 and $100 More than 0 days Y 32% 14%More than 30 days Y 18% 7%More than 60 days Y 11% 5%More than 90 days Y 6% 6%
Application of Valuation File
Valuation of Debt Valuation of Debt
CurrentDebt
Extract
Current DebtComponents
"Coded"
Component 1:Tax Ty pe
Component 2:Collection Age
Component 3:Collection Amt
Component 4:Debt Source
ComponentsMatched to
Valuation File,Valuation %
assigned
DataConsolidatedPer ReportingRequirements
Reporting
Reporting Examples Reporting Examples
Reporting Examples Reporting Examples
Other Report Uses• Debt risk scoring• Strategy effectiveness over time• Taxpayer typology research• Employee performance• Test new collection strategies• Regional analysis• Agency performance benchmarking
Report Utility Report Utility
Report Utility Report Utility
18 Month NRV File ComparisonRetailers' Sales Tax
January 2005 June 2006 % Change
Age in Days Debt Assess Debt Assess Debt Assess
<30 66.4% 13.3% 73.8% 38.4% 11.2% 189.0%
<60 55.7% 11.1% 65.2% 31.1% 17.0% 179.3%
<90 47.9% 9.6% 57.4% 25.4% 19.8% 164.8%
<120 43.4% 8.7% 48.5% 18.7% 11.9% 115.7%
<240 40.6% 8.1% 40.7% 13.9% 0.4% 71.8%
<360 31.3% 6.3% 30.5% 8.5% -2.7% 36.1%
Report Utility Report Utility
January 2005 to Current NRV
0.0%10.0%20.0%30.0%40.0%
50.0%60.0%70.0%80.0%
<30 <60 <90 <120 <240 <360
Age in Days
Cu
mu
lati
ve
Re
civ
ery
2005 Debt 2005 Assess Current Debt Current Assess
Questions and Discussion
Contact Information:Jeff Scott -
(785)[email protected]
Andrew Kapp -(785)[email protected]
ACM data snapshot
Business assessments byTAP
Income tax set up returnsby TAP
AR Data(Data SourcesCombined and
Coded)
Collection report datasnapshot
Recov ery Data(Data Sources
Combined)
NEW warrant andbankruptcy totals
NEW uncollectable andpriv ate collection totals
Legacy Tax Ty pe Entries
ATP NRVValuation
Legacy NRVValuation
Monthly historical totals
Monthly historical aging
Reporting month details
Reporting Month aging
DataConsolidation
AR at aglance-Page 5
ACM AgingAnaly sis -
Page 3
All Tax Ty peOv erv iew-
Page 4
Tax Ty peSummaries-Page 6-19
Recov ery byf iling y ear -
Page 2
NRV by f ilingy ear -Page 2
PC totals,NRV deduct,
BK total,UC total -
Page 2
Recov ereddebt andassess -
Page 2
New debt,New assess-
Page 2
Beginning Inv entory $
Beginning ofmonth
inv entory -Page 2
Endinginv entory $-
Page 2
Reportpage or
page entry
Manualdata
captureSQL Data Monthly
dataset
Size = 3,000Rows
EXTRACT (SQL)All New Debt
Ref errals Betweenmm/dd/y y y y
and mm/dd/y y y y
EXTRACT (SQL)All Credits and
Debits Applied toDebt Ref erred
Between mm/dd/y y y y and mm/dd/
yyyy
Collection Sy stem (ACM)
Codes Assigned to RowsBased on Original Debt
Amount and Debt Age atRow Transaction Date
Row Thresholds Limitedto Maximum of 100%
Recov ery . Debt Remov edf rom Cumulativ e Count
(Denominator) at 100%.
RegressionAnalysis
Starts
This PositionRepresentsCombinedRelational
and Coding(SPSS).
DataLoaded to
DataWarehouse
Codes Assigned to Rowsof Debts Without FinancialTransactions - Based on
Original Debt and Age.(Age based on inactiv e ,
write of f , or currentdate.)
Codes are Joined by TaxTy pe, Age, and AmountCodes. Group f unction
on Codes, Sum onCumulativ e Collection and
Count of Debts.
REPORTFormatted Report
Describing Tax Ty pe,Debt Age, and Debt
Amount
Simple Accounts Receivable Recovery Regression(3 Column)
Codes limitvariables byassigning a
"standard" tier toeach debt and
outcome scenario
Size = 3.5Million Rows
Relational Procedure -Cumulativ e Association of
Debts and FinancialEntries Ov er Time (1 row
represents cumulateactions @ each
transaction date.)
Size = 7.5Million Rows
Data Importedto Sub-Sy stem
Compare Perf ormed inautomated procedures
(SPSS) - No codingnecessary