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Back to basics: Interim tax provisions · PwC's accounting podcast

• 0:00
  SPEAKER_00: Foot Leadership from PwC's National Office.
• 0:07
  SPEAKER_01: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_01: I'm Heather Horn.
• 0:12
  SPEAKER_01: Thanks for joining us today for an episode on the latest developments in accounting and reporting.
• 0:17
  SPEAKER_01: For this episode, I'm pleased to welcome our guest host, Pat Durbin, a regular on the podcast and one of PWC's Deputy Chief Accountants in the National Office.
• 0:28
  SPEAKER_01: I'll turn it over to Pat now to introduce the episode and start the conversation.
• 0:36
  SPEAKER_04: Hi, I'm Pat Durbin, a Deputy Chief Accountant in PWC's National Office and host for today's episode.
• 0:43
  SPEAKER_04: Today we're going back to basics on interim income tax provisions.
• 0:48
  SPEAKER_04: The effective tax rate in an individual interim period, quarter, or year to date, can look very different from the expected rate for the full year.
• 0:58
  SPEAKER_04: The reason is the GAP requires the use of an estimated annual effective tax rate, or you'll hear us say AETR, for calculating interim tax provisions.
• 1:10
  SPEAKER_04: We'll cover how the AETR is calculated, including what constitutes ordinary income, as well as some exceptions for so-called discrete items, and when the usual AETR approach is not applied.
• 1:25
  SPEAKER_04: To help us work through the mechanics, and they are mechanics, as well as some of the areas that can require more judgment, I'm joined by Keith Reimer, a partner in PwC's National Office, and Cassie Bauman, a managing director in our national office.
• 1:40
  SPEAKER_04: Both spend a lot of time helping companies navigate the accounting for income taxes.
• 1:45
  SPEAKER_04: Keith and Cassie, welcome.
• 1:47
  SPEAKER_04: It's great to have both of you with us.
• 1:48
  SPEAKER_04: Good morning, Pop.
• 1:49
  SPEAKER_02: Great to be here.
• 1:50
  SPEAKER_04: So, Keith, maybe we can start with a high-level overview of how quarterly tax provisions work.
• 1:55
  SPEAKER_04: How are they calculated?
• 1:56
  SPEAKER_05: So each quarter, a company needs to estimate its annual effective tax rate or its AETR.
• 2:03
  SPEAKER_05: The AETR is calculated based on a full year forecast of the income tax provision over the full year forecast of pre-tax ordinary income or loss.
• 2:14
  SPEAKER_05: The AETR is then multiplied by the year-to-date pre-tax ordinary income or loss, which gives you your income tax provision year-to-date, excluding discrete items.
• 2:27
  SPEAKER_05: Now, discrete items are certain tax costs or benefits that ASC 740 says should be excluded from the calculation of the AETR.
• 2:39
  SPEAKER_05: These discrete items are layered on in the period that they occur to calculate your year-to-date tax provision inclusive of those discrete items.
• 2:48
  SPEAKER_05: Within a given year, a company will calculate their year-to-date provision.
• 2:54
  SPEAKER_05: So in the current quarter, you're going to calculate your year-to-date provision.
• 2:58
  SPEAKER_05: And the difference between the current quarter's year-to-date provision and the previous quarter's year-to-date provision is your quarterly tax provision for that quarter.
• 3:07
  SPEAKER_05: So for example, let's say in Q1, a company computes a Q1 tax provision of$60 as of March 31st.
• 3:17
  SPEAKER_05: Then in Q2, the company calculates a year-to-date tax provision as of June 30th of$100.
• 3:24
  SPEAKER_05: The difference between the Q2 provision and the Q1 provision, that$40 is your quarterly tax provision for Q2.
• 3:32
  SPEAKER_04: So that could be a function of that$100, meaning I might have updated my estimate of full-year income.
• 3:38
  SPEAKER_04: I might have had a change to my estimated tax for the year, regardless of what happened to actual income that I recognized in that quarter, I'm going to have a tax provision that's based on my year-to-date best estimate of the full year AET.
• 3:53
  SPEAKER_04: Absolutely.
• 3:54
  SPEAKER_04: Yeah.
• 3:54
  SPEAKER_04: So obviously, then the starting point of this whole interim quarterly or quarterly interim, we use it kind of interchangeably, tax provision, is estimating that annual effective tax rate.
• 4:06
  SPEAKER_04: So how do we go about that process?
• 4:09
  SPEAKER_05: There are a couple of components that go into estimating an AETR.
• 4:13
  SPEAKER_05: First, a company needs to estimate their forecasted full year pre-tax ordinary income or loss.
• 4:20
  SPEAKER_05: Then a company needs to estimate their full year forecasted income tax provision, which includes current and deferred taxes, which excludes the discrete items.
• 4:31
  SPEAKER_05: So it's just, as I mentioned previously, it's based on your ordinary income, but it's excluding those discrete items.
• 4:39
  SPEAKER_05: By the way, I can't wait till we talk about it.
• 4:41
  SPEAKER_05: The estimated income tax provision needs to include all items that will make its way into the full year income tax provision at year end.
• 4:48
  SPEAKER_05: So this would include federal, state, foreign income taxes, withholding taxes, impacts of credits, cross-border taxes.
• 4:56
  SPEAKER_05: So you think about in the US, you have guilty, you have BEAT, you need to consider pillar two taxes, and even special deductions.
• 5:02
  SPEAKER_05: So all those things go into calculating your estimated income tax provision.
• 5:08
  SPEAKER_05: And for companies that operate in more than one jurisdiction are subject to tax in multiple jurisdictions, the tax impacts of all jurisdictions need to be included in the worldwide AETR.
• 5:19
  SPEAKER_05: Companies compute one AETR, one worldwide AETR, and that consolidated global AETR is applied against their consolidated global pre-tax ordinary income or loss year-to-date to calculate their year-to-date income tax provision.
• 5:36
  SPEAKER_05: And as we think about this worldwide income tax provision, you need to think about the quarterly income tax provision process in total.
• 5:43
  SPEAKER_05: And by design, there's a lot of estimates that go into calculating the quarterly income tax provision.
• 5:49
  SPEAKER_05: You're estimating your full year income or loss, you're calculating an income tax provision based on that forecasted income or loss.
• 5:56
  SPEAKER_05: And you're also estimating things beyond just the income, but you're estimating potential utilization of credits, potential limitations, which could be dictated based on the levels of income that you have.
• 6:08
  SPEAKER_05: And all of these estimates, that's what the standard requires.
• 6:11
  SPEAKER_05: So each quarter, a company needs to create their best estimate of their forecasted income, their forecasted estimated income tax provision to develop that best estimate of their AETR.
• 6:22
  SPEAKER_04: Yeah, so it sounds like I mean estimates sometimes make us uncomfortable, but that's just inherent in this model.
• 6:28
  SPEAKER_04: So I guess we've got to get comfortable with the uh the process.
• 6:31
  SPEAKER_04: So let's break it down a little further.
• 6:33
  SPEAKER_04: Um, you know, clearly, I think you've mentioned a couple of times that sort of anchor to this concept is our estimate of full year consolidated ordinary income, which is the denominator in this AETR calculation.
• 6:46
  SPEAKER_04: And I just want you to clarify what we mean by ordinary income, which is a term we don't really hear typically when we're talking in gap terms about pre-tax income.
• 6:56
  SPEAKER_04: I know it sort of sounds like an uh important word to tax people, like ordinary versus capital.
• 7:02
  SPEAKER_04: But um, what do we mean by it in this context?
• 7:05
  SPEAKER_05: Sure, Pat.
• 7:05
  SPEAKER_05: And that's a key distinction.
• 7:07
  SPEAKER_05: Ordinary income for AETR purposes is defined in GAAP, but its applicability is generally limited to the income tax accounting model.
• 7:15
  SPEAKER_05: It leverages some pre-tax gap concepts, but it is generally limited to just the income tax accounting model.
• 7:22
  SPEAKER_05: And as you mentioned, for us tax folks, it is not ordinary income in the context of ordinary income versus capital gains that we often think about in the income tax world.
• 7:33
  SPEAKER_05: For AETR purposes, ordinary income is defined as income or loss from continuing operations before income taxes, but excluding significant, unusual, or infrequently occurring items.
• 7:47
  SPEAKER_05: And for those pre-tax items that are not included in ordinary income, those are treated as discrete items and they're excluded from the calculation of the forecasted ordinary income and the AETR.
• 8:00
  SPEAKER_05: The impact of these items and their related tax consequences are accounted for in the period they incur in full.
• 8:07
  SPEAKER_05: And again, not part of the AETR calculation.
• 8:10
  SPEAKER_05: Okay.
• 8:11
  SPEAKER_04: So when we think about the tax provision, we have our uh denominator, which is this ordinary income.
• 8:18
  SPEAKER_04: And then I guess we've talked sort of uh conceptually about the numerator.
• 8:22
  SPEAKER_04: I think you went through it before.
• 8:24
  SPEAKER_04: That's just all of the tax that we would expect to incur worldwide on that ordinary income for the year.
• 8:31
  SPEAKER_04: So that's sort of the numerator denominator that gives us our AETR.
• 8:35
  SPEAKER_04: Okay.
• 8:35
  SPEAKER_04: Um, all right.
• 8:36
  SPEAKER_04: So that's our base model.
• 8:38
  SPEAKER_04: Um, we've touched on this concept of discrete items a couple of times already.
• 8:42
  SPEAKER_04: And I know that's where we tend to get a lot of questions in terms of trying to help people figure out is something discrete or should it be included in the rate, i.e.
• 8:51
  SPEAKER_04: part of ordinary income.
• 8:53
  SPEAKER_04: Cassie, maybe you can help me out here just to help understand what we consider discrete, essentially something other than ordinary.
• 9:00
  SPEAKER_04: And are do we have any typical discrete items or classes or buckets of items that we usually consider to be discrete?
• 9:08
  SPEAKER_03: Yeah.
• 9:08
  SPEAKER_03: So when you're thinking about discrete, like you said, your real starting point is it's tax expense or tax benefit that is not related to ordinary income.
• 9:17
  SPEAKER_03: So you're thinking about what tax expense or tax benefit do I have that relates to any kind of significant unusual or infrequent items.
• 9:27
  SPEAKER_03: So let's pull those apart.
• 9:29
  SPEAKER_03: When you think about unusual, you're thinking about high degrees of abnormality for your particular business.
• 9:36
  SPEAKER_03: So it's through that lens.
• 9:38
  SPEAKER_03: For infrequent, you're thinking about things that aren't reasonably expected to recur in the foreseeable future.
• 9:46
  SPEAKER_03: Now, when you're talking about discrete items, it doesn't need to be both.
• 9:50
  SPEAKER_03: It doesn't need to be unusual and infrequent.
• 9:52
  SPEAKER_03: It can be one or the other to be considered discrete.
• 9:55
  SPEAKER_03: And I think Keith had mentioned discrete items are typically tied to something that happened in that particular quarter.
• 10:02
  SPEAKER_03: So you're you're when you're thinking about like what were the unusual things that happened this quarter, that should spark an idea of maybe maybe the tax effect associated with that could could be discrete.
• 10:14
  SPEAKER_03: Now, as you mentioned, it can require some judgment.
• 10:18
  SPEAKER_03: So an example we like to use is you think about like a standard manufacturing company, if they had losses because a hurricane came through and they had a bunch of costs or they lost, you know, productivity, then any costs associated with that would be discrete.
• 10:36
  SPEAKER_03: But if you were talking about a property and casualty insurer who insures hurricane risks as part of their normal business, then that would not be a discrete, any kind of hurricane cost would not be discrete because it's it's totally their normal business to have those types of costs.
• 10:51
  SPEAKER_04: We seem to always love these natural disaster examples.
• 10:54
  SPEAKER_04: And while they do become seemingly a little bit more frequent, let's maybe take something that's perhaps a little bit more um frequently occurring, but yet might still be considered discrete.
• 11:06
  SPEAKER_04: So maybe goodwill impairment seems like a good one we probably have to deal with a lot.
• 11:10
  SPEAKER_04: How do we think about those?
• 11:12
  SPEAKER_03: Yeah, so typically we think of goodwill impairments most of the time as being discrete items.
• 11:18
  SPEAKER_03: You would hope if you think about um could that have been forecasted as part of my ordinary income?
• 11:23
  SPEAKER_03: You hope the answer is no.
• 11:27
  SPEAKER_03: Exactly.
• 11:28
  SPEAKER_03: Um, but uh but I don't want anyone to think that you should just default to discrete for any type of impairment, because there can be situations where, you know, potentially maybe it could be part of the AETR.
• 11:40
  SPEAKER_03: Um, but there are some items under GAAP that are always discrete and they're called out in 740.
• 11:48
  SPEAKER_03: Discontinued operations is one of them.
• 11:50
  SPEAKER_03: Um changes in accounting principle or changes in tax law are another one.
• 11:55
  SPEAKER_03: Um, one that a lot of companies have is excess tax deductions for stock-based compensation.
• 12:01
  SPEAKER_03: So we typically call them windfalls.
• 12:04
  SPEAKER_03: Those, you know, companies have them every day, but they are and they're always significant, it seems.
• 12:09
  SPEAKER_03: But um, the standard says they are always discrete.
• 12:11
  SPEAKER_03: So those that's not an exhaustive list, but there are some to pay attention to.
• 12:17
  SPEAKER_03: And the the thing to keep in mind though is that generally speaking, discrete items are intended to be exceptions.
• 12:24
  SPEAKER_03: And so um most things kind of start at the bias of it should be in the AETR and then think about is there a reason it shouldn't be in the AETR.
• 12:32
  SPEAKER_04: And I would say maybe some of those, like particularly if we talk about those um stock-based compensation deductions, that's probably a little bit of just a pure exception.
• 12:41
  SPEAKER_04: Like to your point, they tend to be recurring companies have them.
• 12:45
  SPEAKER_04: I think the practical reality is very hard to predict because they depend on employee exercise behavior and depend on what happens to a company's stock price, neither of which really show up anywhere in sort of pre-tax income.
• 12:58
  SPEAKER_04: So it is clearly kind of disconnected with the the book income, but again, more of a practical convention, I would say, than a um, you know, some sort of conceptual basis as to why those would be discrete.
• 13:10
  SPEAKER_04: Um, so when we identify something as discrete, I think um Keith explained that we don't include that in the AATR, but how do we get it back into the tax provision then?
• 13:21
  SPEAKER_03: Yeah, so for each quarter, you're basically taking the AETR calculation that that Keith described, the outcome of that, and you're just adding on or subtracting out whichever direction it goes, the discrete items in order to come up with your total tax expense for the quarter.
• 13:37
  SPEAKER_04: Yeah.
• 13:38
  SPEAKER_04: And so that sounds pretty straightforward, but like when I think about calculating the tax effect of an individual item when we know we don't do tax returns for individual things, we do it for the whole, the whole year for all the things.
• 13:50
  SPEAKER_04: Is there any special mechanic I need to be thinking about to figure out what's the tax effect of that discrete item?
• 13:56
  SPEAKER_03: Yeah, so sometimes there can be both direct and indirect effects of these discrete items, and the stock comp one is a good one.
• 14:02
  SPEAKER_03: So if you think about um stock-based compensation windfalls, you know, they could potentially, I mean, they that that itself is a tax benefit.
• 14:12
  SPEAKER_03: And so that is the direct effect of getting that discrete item recorded.
• 14:17
  SPEAKER_03: Um, but if a company has significant windfalls, it could potentially influence um their assessment of their valuation allowance as a for example.
• 14:27
  SPEAKER_03: And that could be, that could cause them to, you know, have a different valuation allowance assessment this quarter than they had last quarter.
• 14:35
  SPEAKER_03: Um, and that would be an indirect effect of that.
• 14:37
  SPEAKER_03: And so when we're thinking about, okay, well, what's the discrete impact?
• 14:42
  SPEAKER_03: Um, we often encourage companies to kind of do like a with and without calculation.
• 14:46
  SPEAKER_03: Okay, well, if you didn't have that windfall, what would your tax provision be total?
• 14:52
  SPEAKER_03: Um, and if now that you do have it, what is your tax provision?
• 14:55
  SPEAKER_03: The difference between the two is really the amount that we would consider the discrete impact.
• 15:00
  SPEAKER_04: Okay, so probably um conceptually sort of straightforward, but might be some complications when you get to dealing with specific circumstances.
• 15:09
  SPEAKER_04: So we either have an ordinary item or a discrete item, and depending on which category the item falls into really dictates how it gets reflected in the quarterly tax provision.
• 15:21
  SPEAKER_05: That's right.
• 15:22
  SPEAKER_05: So some items don't fall exclusively into one bucket.
• 15:27
  SPEAKER_05: Certain items may fall into the AETR or reflect in the AETR or could be recorded discreetly, and that depends on what is driving the change.
• 15:36
  SPEAKER_05: Some of them, as I mentioned, can end up in either flavors of whether it's discrete or AETR.
• 15:42
  SPEAKER_05: For instance, as it relates to uncertain tax positions, if a company expects to record a tax expense or benefit related to current year income items, that UTP and that tax expense would be reflected in the AETR.
• 15:57
  SPEAKER_05: If, however, a company is changing its view with respect to a UTP and is going to record a tax expense or benefit related to a prior UTP, let's say they got new information.
• 16:07
  SPEAKER_05: Let's say they got new information that changes their judgment related to the recognition or measurement of that UTP that was there in the prior year, that amount would be recorded on a discrete basis.
• 16:19
  SPEAKER_05: Another area where there's an element of AETR or a discrete element is valuation allowance.
• 16:25
  SPEAKER_05: So let's say a company has a beginning of year deferred tax asset.
• 16:29
  SPEAKER_05: And let's say during the current year, they have a change in view as it relates to whether that DTA needs a VA.
• 16:36
  SPEAKER_05: So the DTA may have a VA that needs to go up or that VA may need to go down.
• 16:42
  SPEAKER_05: If that change in the VA is due to a change in the expected availability of future taxable income, so not current year income, but future taxable income, the impact of that change would be recorded on a discrete basis.
• 16:56
  SPEAKER_05: However, changes in VA can also be included in the AETR.
• 17:01
  SPEAKER_05: If a company determines that a VA is needed for temporary differences or carry-forward items that originate in the current year, or if there is a change in view as it relates to a beginning of year deferred tax asset based on a change in expectations in current year ordinary income, those changes would be reflected in the AETR.
• 17:22
  SPEAKER_04: So I think that's a couple of really good points, and maybe one just sort of shorthand way to think about it.
• 17:29
  SPEAKER_04: It's not maybe the be all end all, but sort of current year changes, current year things, they go in the rate, things that relate to either prior years or future years, so not part of the current year, typically we're going to treat those discreetly.
• 17:44
  SPEAKER_04: I mean, that's sort of a general.
• 17:45
  SPEAKER_04: I think that's a great way to think about it.
• 17:46
  SPEAKER_04: Yeah.
• 17:47
  SPEAKER_05: Another area where you can have an AETR element or a discrete element is indefinite reinvestment assertions.
• 17:54
  SPEAKER_05: So assume a company has a change in their indefinite reinvestment assertion during the current year.
• 18:00
  SPEAKER_05: And if that change relates to current year earnings, the change in the assertion is reflected in the AETR.
• 18:07
  SPEAKER_05: So you think about current year earnings.
• 18:09
  SPEAKER_05: So current year earnings of a foreign subsidiary or even current year CTA on prior year earnings, that change would be recorded as part of the AETR.
• 18:18
  SPEAKER_05: If, however, the change in the assertion impacts prior year earnings of, say, a foreign subsidiary, that amount would be recorded on a discrete basis and not part of the AETR.
• 18:28
  SPEAKER_04: Yep.
• 18:28
  SPEAKER_04: So again, I think that point about it's previously accumulated earnings, some change in judgment, not related to the current year, going to handle that discreetly versus if we're talking about things that arise, the CTA example is a good one in the current year.
• 18:41
  SPEAKER_04: We're going to think about that as going through the rate.
• 18:44
  SPEAKER_04: So I guess it's not just whether we label something ordinary or discrete.
• 18:50
  SPEAKER_04: It's really we have to look at what caused the item to change.
• 18:55
  SPEAKER_04: You know, what's the underlying driver?
• 18:57
  SPEAKER_04: And that's really what tells us whether the effect belongs in the annual rate, the current quarter, or potentially some combination of the two.
• 19:05
  SPEAKER_04: So in addition to those discrete items where we're calculating an AETR, but just excluding some items, I think you mentioned in the tee up that there are actually situations where we don't even use the AETR approach.
• 19:19
  SPEAKER_04: Cassie, what are some circumstances where we have that sort of complete departure from this basic model?
• 19:25
  SPEAKER_03: Yeah, so the standard lays out a couple of exceptions.
• 19:29
  SPEAKER_03: And the first is when you have a situation where you have a jurisdiction that is either generating an ordinary loss year to date or anticipates an ordinary loss for the full year, and that loss would not be able to be benefited, meaning they would need a valuation allowance on that loss.
• 19:49
  SPEAKER_03: In that situation, you would strip that jurisdiction out of your worldwide AETR and just do its own AETR calculation.
• 19:58
  SPEAKER_03: And if you're in a full valuation allowance position, a lot of times that kind of single jurisdiction AETR tends to be zero.
• 20:06
  SPEAKER_03: However, the thing to keep in mind here is that this exception applies when you wouldn't be able to recognize any benefit related to that loss.
• 20:16
  SPEAKER_03: So if you can recognize some benefit, like maybe you need a partial VA, then you wouldn't qualify for this exception.
• 20:22
  SPEAKER_03: So sometimes that comes up and people are disappointed that they don't qualify for the exception.
• 20:27
  SPEAKER_04: So no benefit means no benefit.
• 20:29
  SPEAKER_03: That's right, no benefit.
• 20:31
  SPEAKER_04: Um so that one I guess seems um somewhat sort of understandable.
• 20:35
  SPEAKER_04: Any other cases where we would sort of exclude or or depart from this AETR approach?
• 20:40
  SPEAKER_03: Yeah, the other one that comes up and then that the standard allows for is an exception where a company cannot reliably estimate an AETR for a particular jurisdiction or maybe the whole entire worldwide AETR.
• 20:54
  SPEAKER_03: And so when you think of going back to your numerator-denominator discussion, um, you know, you've you're forecasting your provision, that's the numerator for your ordinary income, and then you're forecasting your ordinary income, that's your denominator.
• 21:09
  SPEAKER_03: And so, and that's what gives you your AETR.
• 21:11
  SPEAKER_03: So sometimes people think, oh, well, maybe I can't reliably estimate the numerator, or I can't reliably estimate the denominator.
• 21:18
  SPEAKER_03: And there's kind of a presumption that you can.
• 21:20
  SPEAKER_03: I mean, think about all the places that you're providing forecast information to your board and to, you know, stakeholders and things like that.
• 21:28
  SPEAKER_03: But this is really about forecasting reliably the AETR itself.
• 21:33
  SPEAKER_03: And so sometimes where this can come up is a situation where you might have significant permanent differences as part of your tax provision, your numerator.
• 21:43
  SPEAKER_03: And maybe you're forecasting near break even for your denominator.
• 21:47
  SPEAKER_03: So you have a really small denominator.
• 21:50
  SPEAKER_03: And even if you're pretty good at forecasting, um, if you're off by just a little on that ordinary income number, that can wildly change the AETR that comes.
• 22:00
  SPEAKER_03: Out of that calculation.
• 22:01
  SPEAKER_03: And so sometimes when companies are in that situation, they may conclude that you know they can't reliably estimate the AETR.
• 22:10
  SPEAKER_03: Now, one thing I want to distinguish that from is situations where you get wonky numbers for your AETR, right?
• 22:16
  SPEAKER_03: Sometimes companies put their AETR calculations together and they'll come up with like a 200% rate or a 2% rate or a negative 20% rate.
• 22:26
  SPEAKER_03: And they'll say, boy, I think I can't reliably estimate.
• 22:29
  SPEAKER_03: And the reality is like that can be a good number.
• 22:33
  SPEAKER_03: That can be a good AETR.
• 22:36
  SPEAKER_03: If that's where it's going to come out at the end of the year, you know, it's, it's, um, it doesn't just because it's not close to what you would think your kind of blended tax rate is for all the jurisdictions you're in, that doesn't mean that it's not a reliable AETR.
• 22:50
  SPEAKER_03: So that's an important distinction.
• 22:51
  SPEAKER_04: Yeah, I think I got the concept that just because it's a weird-looking um effective tax rate doesn't mean it's an unreliable effective tax rate.
• 23:00
  SPEAKER_04: And it is kind of an interesting sort of um outcome, I guess, of this model, right?
• 23:05
  SPEAKER_04: It's very much built around the concept of look, I'll project my income for the year, I'll come up with a rate for the income for the year, and I should sort of accrue tax as I earn the income for the year.
• 23:16
  SPEAKER_04: And that all works great if I'm earning income everywhere and I have sort of ordinary-ish, you know, tax things going on.
• 23:23
  SPEAKER_04: But if I have losses in some jurisdictions and income in others, and pretty large rate differentials, permanent items you mentioned, or you know, some jurisdictions where I'm not going to be able to take a benefit for a loss, you can get these very odd-looking um rates, but that's just sort of how the model works.
• 23:40
  SPEAKER_04: And there's not really an exception just because it's a weird, weird-looking rate.
• 23:44
  SPEAKER_03: Yep, that's right.
• 23:45
  SPEAKER_05: Yeah.
• 23:45
  SPEAKER_05: Um, there's one more area that I can think of that's comes up sometimes, and that's around what to do with a zero rate jurisdiction.
• 23:52
  SPEAKER_05: Does the zero rate jurisdiction get pulled out of the ATR under the exception that Cassie mentioned, a lost jurisdiction where there is no benefit, or does the zero rate jurisdiction stay in the ETR on the basis that having a zero rate is different than being in a lost jurisdiction?
• 24:08
  SPEAKER_05: This is not addressed in the codification.
• 24:10
  SPEAKER_05: So there's likely more than one acceptable view out there.
• 24:14
  SPEAKER_05: We do discuss zero rate jurisdictions in our income tax guide in chapter 16.
• 24:18
  SPEAKER_05: So for our listeners, if they want to learn a little bit more, they can go take a look at chapter 16 in our income tax guide.
• 24:24
  SPEAKER_04: Yeah, that's that's an interesting one.
• 24:25
  SPEAKER_04: And I know there's a lot of nuances in this space.
• 24:27
  SPEAKER_04: Um, so certainly encourage folks to take a look at some of the interpretive guidance we have in chapter 16.
• 24:33
  SPEAKER_04: Um, we've covered the basic model and uh some of the various exceptions.
• 24:39
  SPEAKER_04: In the context of interim financial reporting, are there any special disclosure considerations we have to think about?
• 24:46
  SPEAKER_05: Most income tax disclosures are only required for annual periods.
• 24:49
  SPEAKER_05: However, if there's a significant change in an estimate during an interim period that impacts or relates to the income tax accounts, companies should disclose that.
• 24:59
  SPEAKER_05: This includes changes in estimates for evaluation allowances, uncertain tax positions, or changes in the annual effective tax rate for the year.
• 25:08
  SPEAKER_05: Also, under the risk and uncertainties guidance, it applies more broadly to the financial statements, not just income taxes, companies should consider disclosing if it is reasonably possible the material change may occur in the near term and not just wait until the change actually occurs.
• 25:25
  SPEAKER_05: Also, it's also worth mentioning there are certain disclosure related to investments in tax credit structures that are required on both an interim and an annual basis, like the amount of tax credits and other tax benefits recognized in the period and where they were presented in the income statement and cash flow statements, and the amount of actual investment itself and where it is presented in the balance sheet.
• 25:48
  SPEAKER_04: Sort of seems like an odd one.
• 25:49
  SPEAKER_04: Sort of got stuck in after the fact.
• 25:51
  SPEAKER_04: Absolutely.
• 25:52
  SPEAKER_04: Okay, good, good, good to know.
• 25:54
  SPEAKER_04: Um, so sounds like um mostly on the interim basis, it's more about coming up with the numbers, a little less so about some of the disclosures where we have pretty extensive battery disclosures for the um the annual financial statement.
• 26:06
  SPEAKER_04: So maybe um with that um we can sort of move to sort of wrap this up and maybe just try to leave a few key takeaways from our discussion here.
• 26:14
  SPEAKER_04: So maybe I'll start with you, Keith.
• 26:16
  SPEAKER_05: I think there are two that I'll mention.
• 26:17
  SPEAKER_05: There are, the first one is there are very few circumstances when a jurisdiction or an item should be excluded from the AETR.
• 26:25
  SPEAKER_05: Most things are going to end up in the AETR, and it's more of an exception based than the norm in terms of pulling something out.
• 26:32
  SPEAKER_05: And also remember that interim tax accounting is forward-looking.
• 26:36
  SPEAKER_05: Each quarter, companies should reassess their expectations for the full year and update the AETR as facts and circumstances change, including changes of forecast and ordinary income.
• 26:46
  SPEAKER_05: The AETR is based on your best estimate of the full year.
• 26:50
  SPEAKER_04: Yeah, and I think this is one where we we talk a lot about the need for sort of the accounting and finance organizations to work collaboratively with tax.
• 26:58
  SPEAKER_04: And that's a critical point in this context to really be aligned with what's happening in the business with these forecasts of future taxable income.
• 27:07
  SPEAKER_04: That all has to hang together.
• 27:09
  SPEAKER_04: So, Cassie, how about you?
• 27:10
  SPEAKER_04: Any final takeaways?
• 27:12
  SPEAKER_03: Yeah, I'd say when you're thinking about discrete items, you know, judgment is required.
• 27:16
  SPEAKER_03: So really focus on what's driving them in order to figure out whether they're discrete.
• 27:20
  SPEAKER_03: And remember that there are some things like Keith talked about, like VAs and UTPs that could have um both a discrete impact and an AETR impact.
• 27:31
  SPEAKER_03: And then the last is just what we were talking about with unusual rates, like just because you come up with an unusual looking uh AETR doesn't mean that you qualify for one of the exceptions.
• 27:41
  SPEAKER_04: Yeah.
• 27:42
  SPEAKER_04: No, that's great.
• 27:43
  SPEAKER_04: And thank you both for uh you know walking us through the uh the interim calculation.
• 27:47
  SPEAKER_04: I guess my takeaway is that, like a lot of areas of income tax accounting, we start with what seems like a relatively straightforward principle.
• 27:54
  SPEAKER_04: In this case, estimate my full year tax, divide by my estimated full year income, and that gives me my AETR, then take that AETR times my year-to-date income to get my year-to-date provision, subtract the prior year-to-day provision, and I get my current quarter provision.
• 28:10
  SPEAKER_04: But then, of course, we have to think about a number of exceptions of the principle, which usually requires the application of some judgment.
• 28:18
  SPEAKER_04: And some of those exceptions may not be entirely intuitive.
• 28:21
  SPEAKER_04: So I think we mentioned before we have some guidance in our income tax guide.
• 28:25
  SPEAKER_04: It's chapter 16.
• 28:26
  SPEAKER_04: I think it's got some helpful um commentary around how to think through some of those judgments.
• 28:32
  SPEAKER_04: So thank you both again.
• 28:33
  SPEAKER_04: Really appreciate the discussion.
• 28:34
  SPEAKER_04: Thanks, Pat.
• 28:35
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