Latest / PwC's accounting podcast / Year-end toolkit: Accounting and reporting reminders for 2026

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Year-end toolkit: Accounting and reporting reminders for 2026 · PwC's accounting podcast

0:00
SPEAKER_04: Thought Leadership from PWC's National Office.
0:07
SPEAKER_00: Hello and Happy New Year.
0:09
SPEAKER_00: Welcome to PWC's Accounting Podcast.
0:12
SPEAKER_00: I'm Heather Horn.
0:13
SPEAKER_00: To kick off the new year, we're launching our annual year-end miniseries, a set of episodes designed to help you navigate the year-end close process.
0:21
SPEAKER_00: And even if you're not currently at year-end or directly involved in the close, this series is still for you.
0:27
SPEAKER_00: The topics we cover are foundational for all finance teams all year long.
0:32
SPEAKER_00: Today's episode is our year-end accounting and reporting reminders episode, where we're bringing together timely insights from some of the top technical leaders in our national office.
0:41
SPEAKER_00: They cover a wide range of topics, including tariffs, income taxes, held-for-sale accounting, and several other issues that tend to surface at year-end.
0:50
SPEAKER_00: Think of this episode as a one-step refresher as you close out the year.
0:57
SPEAKER_00: Joining us for this discussion are Beth Paul, Brett Julie, and Pat Durbin, all deputy chief accountants in our national office.
1:04
SPEAKER_00: And I'm also excited to welcome our guest host, Tom Barbieri.
1:08
SPEAKER_00: Tom's PWC's U.S.
1:09
SPEAKER_00: Chief Accountant, and he brings his own perspective to these year-end challenges.
1:14
SPEAKER_00: With that, let's kick off 2026 and start the episode.
1:18
SPEAKER_06: Beth, Pat, and Brett, welcome.
1:20
SPEAKER_06: Thanks for making some time today with us.
1:22
SPEAKER_06: There's a lot of activity out there for this year, and we're going to get into a lot of the big, you know, I'll call it trends that are out there, whether it's some of the AI mega deals, whether it's private credit, and some of the other areas that we're seeing from a transaction perspective, certainly helping to prepare people for year end and some of the issues that they're going to run into.
1:42
SPEAKER_06: So why don't we get started?
1:43
SPEAKER_06: We're going to start with AI.
1:45
SPEAKER_06: And I hate to do that because I feel like it's the most overused phrase right now.
1:50
SPEAKER_06: Ubiquitous.
1:51
SPEAKER_06: Exactly.
1:51
SPEAKER_06: But let's let's get into it, Fat.
1:53
SPEAKER_06: So we're seeing a lot of these AI mega deals, right?
1:56
SPEAKER_06: And there's a lot of accounting questions around it.
1:58
SPEAKER_06: But maybe you can give some context on the nature of the deals we're seeing, some of which are highly structured, you know, multiple parties involved, many types of investments or features to them.
2:09
SPEAKER_06: Can you give us a flavor of what we're seeing in practice?
2:11
SPEAKER_02: Yeah, and you're right.
2:12
SPEAKER_02: I mean, they are certainly making headlines, they're they're moving the market.
2:16
SPEAKER_02: Um, they are really large, right?
2:19
SPEAKER_02: The the dollars numbers on these are significant, right?
2:23
SPEAKER_02: So we've been spending time thinking about some of the accounting for it beyond, you know, sort of the real like business decisions that you know companies are making and the reasons why they're making these.
2:34
SPEAKER_02: And there's a whole, you know, another conversation we could have on that.
2:38
SPEAKER_02: But if we if we just take a look at the sort of flavor that we're seeing, the first thing, you know, we've talked already about the scale of them, and that that sort of drives the need for maybe multiple parties.
2:49
SPEAKER_02: You need lots of capital.
2:50
SPEAKER_02: Yep.
2:51
SPEAKER_02: You need the actual semiconductors themselves, you need a ton of real estate, you need a ton of power.
2:59
SPEAKER_02: Um, and then if you're gonna make all that investment, you'd like to think there's you know some demand.
3:04
SPEAKER_02: So maybe you're looking around for some guarantee of demand, could come from one of those other parties that's already involved too.
3:12
SPEAKER_02: So you start to see a little bit of this.
3:13
SPEAKER_02: There is some element of you know, a cycle to these.
3:18
SPEAKER_02: You know, I I hesitate to use the round-tripping phrase, but you know, I think that sort of criticism is has been out there.
3:25
SPEAKER_02: So I think just you know, stepping back and really understanding what's going on, what the roles of all the parties are, how these arrangements are coming together is really the important first step.
3:37
SPEAKER_02: Um, because clearly all the deals are a little bit unique, they've all got their own flavor to them, and there there might be some pretty interesting terms buried in there.
3:47
SPEAKER_02: Um so I think it's just really important to understand commercial substance.
3:51
SPEAKER_06: Aaron Powell Yeah, certainly.
3:52
SPEAKER_06: I think that's that's probably the most critical thing is stepping back, as you suggest, and and understanding what are all the parties, how are they getting their economics, you know, if there are exit strategies, what are those exit strategies, et cetera.
4:04
SPEAKER_06: So let's get into some of the financial reporting um considerations around that.
4:08
SPEAKER_06: Bet, do you want to kick that off?
4:09
SPEAKER_03: Aaron Powell Yeah, sure.
4:10
SPEAKER_03: I mean I think the accounting really is going to depend on the transaction and understanding the economics and all the pieces of it.
4:15
SPEAKER_03: But we often see um consolidation issues because we set up a variable interest entity or a VIE structure.
4:21
SPEAKER_03: So we've got to assess for consolidation.
4:24
SPEAKER_03: Sometimes we see, as Pat mentioned, like cash being paid for something, and then we have to figure out is that a business combination or is it an asset acquisition?
4:31
SPEAKER_03: And if there's contingent payments, that model is really going to matter because under the BISCOM, that's gonna be a fair value model for that contingent consideration.
4:38
SPEAKER_03: Under an asset model, it's the 450 probable best estimate.
4:42
SPEAKER_03: Got it.
4:43
SPEAKER_03: And so there's a lot of issues there.
4:44
SPEAKER_03: And then sometimes you're not, you know, you're you don't get to consolidation, but you've got an investment in and you might have significant influence in equity method, which I know we'll get into a little bit later.
4:53
SPEAKER_06: Got it.
4:54
SPEAKER_06: Yep, those are great considerations.
4:55
SPEAKER_02: Yeah, I I think the one thing maybe to just think about too is the fact that you sometimes have multiple individual contractual arrangements, but they're all part of one overall project.
5:07
SPEAKER_02: And so you also need to assess do I need to think about that as really one combined arrangement as a starting point?
5:13
SPEAKER_02: Because there's sort of a common commercial objective, and and gap sort of requires you to think about that holistically.
5:20
SPEAKER_02: You will ultimately get back to parsing that out into the various different elements from an accounting standpoint.
5:26
SPEAKER_02: But step one is sort of putting them all together, seeing what you're dealing with, and then working through the allocation.
5:32
SPEAKER_06: Yeah, that allocation, yeah, exactly.
5:34
SPEAKER_06: Thatloc allocation uh framework is going to be really important in those considerations.
5:38
SPEAKER_06: So, Brett, how about you from a financial instruments perspective?
5:40
SPEAKER_06: We're seeing some features that would sort of meet that scope of the literature.
5:44
SPEAKER_05: Yeah, like Pat was saying, is it's important to look into these arrangements and identify other obligations that exist.
5:51
SPEAKER_05: They may break there may be guarantees, leases, or other embedded features that you have to um do separate accounting for.
5:58
SPEAKER_05: I think these mega deals, you know, by their very nature, they tend to bundle a wide range of contractual elements that may be derivatives, um, there may be uh liabilities under ASC 480.
6:09
SPEAKER_05: And some of these deals have structured financing terms or contingent payments that require uh a closer look.
6:17
SPEAKER_05: I think of these arrangements, and part of the real complexity is um that complexity that makes them challenging to look at.
6:24
SPEAKER_05: Uh it's not just a lease contract, it's not just a revenue contract or just an equity investment.
6:29
SPEAKER_05: Individually, those are complicated, right?
6:31
SPEAKER_05: Right.
6:31
SPEAKER_05: But when you have them all together in one arrangement, you need to separate them out and think about them, often with accounting literature that was developed separately and with different frameworks.
6:41
SPEAKER_05: So it can be very, very confusing.
6:43
SPEAKER_06: Yeah, and I that's right.
6:44
SPEAKER_06: I think the the uh frameworks that exist now only contemplated that individual transaction, right, or feature, not this sort of multiple element.
6:52
SPEAKER_06: So maybe we'll get into that, Pat.
6:53
SPEAKER_06: Once you've carved out all these like non-revenue components, what are what should people be thinking about from a revenue recognition perspective?
7:00
SPEAKER_02: Yeah, so and and gap is really designed for revenue sort of to come last.
7:04
SPEAKER_02: Um, so you have to go through all of those other pieces before you get to revenue.
7:08
SPEAKER_02: So I think that's an important point.
7:10
SPEAKER_02: Um, you know, revenueslash leases kind of comes last.
7:14
SPEAKER_02: Um, and you sometimes end up then with just what's left over.
7:17
SPEAKER_02: Um, you know, some might think of it as a residual.
7:20
SPEAKER_02: Um, not always, but oftentimes that that turns out to be the case.
7:25
SPEAKER_02: Um, once you get to that point, then you have the more customary revenue considerations.
7:31
SPEAKER_02: So we've talked about some of these investments are in companies that maybe are much less mature than the party that's providing the capital.
7:41
SPEAKER_02: Um, they might also be the party that's going to sell in to the uh the investee.
7:46
SPEAKER_02: So you have to think about collectability.
7:48
SPEAKER_02: Is collectability of your revenue arrangement probable?
7:52
SPEAKER_02: That's inherent in any revenue arrangement, but just maybe an additional consideration.
7:57
SPEAKER_02: You know, vendor financing um isn't inherently a problem, right?
8:01
SPEAKER_02: Plenty of vendors provide financing to their customers, but common transactions sort of have to make sure it's at, you know, I'll call call it normal terms and there's a reasonable expectation that there's wherewithal to pay.
8:13
SPEAKER_02: Some of these arrangements, again, because of their size, because of the uh perhaps desire to have guaranteed demand, um, there may be some features that look like they could be a repurchase obligation or a repurchase right.
8:29
SPEAKER_02: Um, that can influence your question or your decision as to whether you think you've transferred control of something.
8:34
SPEAKER_02: So you have to evaluate those considerations.
8:37
SPEAKER_02: Got it.
8:38
SPEAKER_02: Sometimes if you're agreeing to either buy things back or you're selling um with a repurchase right, you might end up thinking it looks more like a lease than a revenue arrangement.
8:50
SPEAKER_02: So then you get uh hooked into the lease model, you have to go through all of the lease accounting considerations at that point.
8:57
SPEAKER_02: So that's something to be on the lookout for.
8:59
SPEAKER_02: Um and then, you know, sometimes there are both lease and revenue arrangements.
9:04
SPEAKER_02: I talked about the two of them sort of coming last.
9:06
SPEAKER_02: And if you end up with two of those things, you still have to do an allocation between the two, but it's not a fair value allocation.
9:13
SPEAKER_02: Then it's what we call a relative standalone selling price, which is a little bit more judgmental and you just have to work through that.
9:20
SPEAKER_02: And so there's there's a lot of considerations here, and I think as Brett was alluding to, you probably need some specialist help.
9:27
SPEAKER_02: I mean, when we get these in our national office, we're often talking across all of our specialist teams to try to figure these out.
9:35
SPEAKER_06: Right.
9:35
SPEAKER_06: Well, the embedded lease one's often one that's that's missed.
9:38
SPEAKER_06: People say if there's not a lease agreement, right?
9:40
SPEAKER_06: They they don't necessarily run to go evaluate from a lease perspective.
9:44
SPEAKER_06: So that's certainly something that's important.
9:46
SPEAKER_06: I agree on the allocation front, getting that prioritization right of what the ordering is and how to do that is is increasingly important.
9:53
SPEAKER_06: So a lot of unique features as a result of the negotiation with the many parties and so much dollars being thrown that way.
10:01
SPEAKER_06: And so we're seeing things that are rather creative.
10:04
SPEAKER_06: Um, how do people think about substance versus form in thinking about these accounting issues?
10:10
SPEAKER_02: Yeah, it's it's a good question because we we oftentimes like to say, you know, substance really should govern, right?
10:17
SPEAKER_02: We should be accounting for the substance of the transaction rather than maybe some nuanced legal form.
10:23
SPEAKER_02: But the reality is uh a lot of these contractual arrangements have terms in them that are important and ultimately they may tend to drive your uh conclusions about what the substance really is.
10:35
SPEAKER_02: So you you do really need to get in and understand what's in the contracts.
10:39
SPEAKER_02: I mean, it's very important to have that macro view of what's going on, kind of commercial substance, business purpose, economics, but you have to calibrate that to the actual contractual terms.
10:50
SPEAKER_02: And with you know, all respect to our partner Mike Coleman, who loves to say read the final contract, read the final contract.
10:58
SPEAKER_06: Yeah, that that F could be interpreted multiple ways.
11:00
SPEAKER_06: I often think of it as full contract, read the full contract.
11:04
SPEAKER_06: So you're not missing anything, Pat, but I agree.
11:06
SPEAKER_06: Listen, I probably the most important thing with these transactions, probably a good reminder for situations where people have multiple arrangements with uh similar counterparties is thinking about the potential for related party disclosures or transparency around disclosure.
11:18
SPEAKER_06: It's probably a good reminder for people to make sure that that entire story is well understood by users of the financial statements.
11:26
SPEAKER_06: And so probably a good reminder there as well.
11:28
SPEAKER_06: Trevor Burrus, Jr.
11:28
SPEAKER_06: Absolutely.
11:29
SPEAKER_06: So one area we touched on a little bit, Beth, with these transactions was equity method, right?
11:35
SPEAKER_06: If you're looking at an entity, what what are some of the things you should be thinking about and whether you need to apply the equity method or not?
11:41
SPEAKER_03: Yeah.
11:41
SPEAKER_03: I mean I think the place to start is first to figure out if you have invested in a corporation or a partnership because the models are distinct and different.
11:49
SPEAKER_06: Yep.
11:50
SPEAKER_03: And then you know, if you've invested in a limited liability company or an LLC for short, you know, is it functioning like a partnership?
11:57
SPEAKER_03: That is, does it have separate capital accounts and I should follow the partnership model, or is it functioning like a corporation and I should follow that model?
12:03
SPEAKER_06: So you're sort of in between partnership and corporation, you need to make a call.
12:06
SPEAKER_03: You have to make a call to get the right model there.
12:09
SPEAKER_03: Um and you know, the partnership model we'll get into it, but it's definitely a lower threshold.
12:12
SPEAKER_03: So that's really important to know.
12:14
SPEAKER_03: You're going to apply the equity method unless you have virtually no influence.
12:18
SPEAKER_06: Got it.
12:19
SPEAKER_06: Got it.
12:19
SPEAKER_06: So really low standard.
12:21
SPEAKER_06: I guess the theory behind that is it's a partnership and partnerships are different.
12:25
SPEAKER_06: You're a partner in the entity, and so the rights there are inherently different than a corporation.
12:30
SPEAKER_03: Aaron Powell That's right, right.
12:31
SPEAKER_03: And so really low percentage, three to five percent we're seeing equity method be applied in practice.
12:37
SPEAKER_06: Aaron Powell Got it.
12:37
SPEAKER_06: Yeah, that's an area it's often missed.
12:40
SPEAKER_06: So how about corporations?
12:42
SPEAKER_03: Yeah.
12:42
SPEAKER_03: So for corporations, I think the first thing you have to look at is it applies to both your investments in your common stock and in substance common stock.
12:49
SPEAKER_03: And um, you know, the term in substance common stock feels all fancy, I guess, right?
12:54
SPEAKER_03: But it's basically an investment that acts like common stock.
12:57
SPEAKER_03: So you look at not you know what it's legally called, but like the substance of it.
13:01
SPEAKER_03: Does it have subordination?
13:03
SPEAKER_03: Does it have any kind of liquidity preferences that might suggest it's not in substance common stock?
13:07
SPEAKER_03: So you you kind of look at those types of things.
13:09
SPEAKER_03: Then the model is once you have your common stock and in-substance common stock, the presumption is if you own 20% or more, you've got significant influence.
13:17
SPEAKER_06: Got it.
13:17
SPEAKER_06: Got it.
13:18
SPEAKER_06: So it's presumption, but let me let me talk a little bit about how would you overcome that presumption or some what are some of the considerations you should be thinking about in making that analysis.
13:27
SPEAKER_03: Right, right.
13:27
SPEAKER_03: So it isn't a bright line.
13:28
SPEAKER_03: It's it is that presumption.
13:30
SPEAKER_03: Um you can look to other factors in the standard.
13:32
SPEAKER_03: So perhaps there is a significant person on the other side that maybe has control.
13:37
SPEAKER_03: Um things like that might get you to not having significant.
13:41
SPEAKER_03: But I gotta tell our listeners, generally, when you're at that above 20 percent, you're gonna be in the equity method.
13:46
SPEAKER_06: Yeah, hard to hard to overcome.
13:47
SPEAKER_06: Hard to overcome.
13:48
SPEAKER_06: Yeah.
13:48
SPEAKER_06: Um how about when you're below 20 percent?
13:51
SPEAKER_06: Are there situations in which you still could get tripped up into equity methods?
13:54
SPEAKER_03: Yeah, and that's probably the area we see, right?
13:56
SPEAKER_03: People have 16, 17 percent.
13:58
SPEAKER_03: They say, oh, it's below 20 percent.
13:59
SPEAKER_03: But the standard has factors to consider, right?
14:01
SPEAKER_03: Things like board of director seats, um, the ability to participate in policy-making decisions, intra-entity transactions, technological dependencies, sharing of management, those type of things might give you significant influence.
14:14
SPEAKER_03: And so in that case, even though you're below 20 percent, you're still gonna apply the equity method of accounting.
14:20
SPEAKER_06: Aaron Powell Got it.
14:21
SPEAKER_06: So it's really important for you to understand the other rights you might have to other contractual arrangements, for example, and doing that analysis, and don't just isolate it on the rights that you sort of have in your equity ownership.
14:30
SPEAKER_03: That's right.
14:31
SPEAKER_06: Got it.
14:32
SPEAKER_06: How about from a disclosure perspective?
14:33
SPEAKER_06: There's some unique disclosures that are required for equity method investments, right?
14:37
SPEAKER_03: That's right.
14:37
SPEAKER_03: So beyond just what's in ASC 323, if you're a registrant, there's probably two areas to focus on.
14:43
SPEAKER_03: One is Rule 309, which is a requirement to include full financial statements for individual equity method investments that exceed 20 percent of either the investment or the income test of significance in 102W.
14:58
SPEAKER_06: Got it.
14:58
SPEAKER_03: So that can be quite a burden, especially if you figure out that towards the end of the year that you're gonna need these financials and you got to go to your um investee and ask for them.
15:07
SPEAKER_06: Yeah.
15:07
SPEAKER_06: And those have got to be audited and audited for the years that they exceed significance.
15:11
SPEAKER_03: So if you exceed in one year but not the other two, you got one year audited, but you still need the three years, full footnotes, all of that.
15:17
SPEAKER_06: Got it.
15:17
SPEAKER_06: So a lot of work behind the scenes to comply with that.
15:20
SPEAKER_03: That's right.
15:20
SPEAKER_03: And then the second area is Rule 408G, which requires for either individually equity methods that exceed any of the three significance tests under 102W.
15:30
SPEAKER_03: So it brings in that asset test as well.
15:33
SPEAKER_03: You and you exceed 10 percent, or in the aggregate, if all the equity method investments together exceed 10 percent, then you have to have some summarized financial information.
15:42
SPEAKER_03: Now, astute listeners might say, well, 323 has some summarized information I need, but um the 40HE is very specific on the specific lines that you need to uh include, where 323 is more of a principle-based disclosure.
15:56
SPEAKER_06: Got it.
15:56
SPEAKER_06: Great.
15:57
SPEAKER_06: Thanks.
15:57
SPEAKER_06: Thanks for that.
15:58
SPEAKER_06: Let's so let's shift gears a little bit.
16:00
SPEAKER_06: Um let's talk tariffs and trade.
16:02
SPEAKER_06: So so Pat, there's been obviously a lot of activity on that front.
16:06
SPEAKER_06: What's the latest that we're seeing relative to the impacts of tariffs?
16:10
SPEAKER_02: Yeah.
16:10
SPEAKER_02: So I mean, we've talked a lot about tariffs throughout the year.
16:14
SPEAKER_02: Um, in some ways, it feels a little bit like old news at this point.
16:18
SPEAKER_02: I think since August now we have basically a 10% baseline tariff on pretty much all countries.
16:24
SPEAKER_02: There's still various individual country by country trade deals that are carve-outs and things as well, right?
16:31
SPEAKER_02: I mean the biggest thing really right now is this uh pending Supreme Court ruling on the challenge to some of the tariffs um that were levied in reliance on this international emergency economic powers act or AIPA.
16:46
SPEAKER_02: Um depending on what the court ruled, that could potentially invalidate some of the tariffs that were previously levied.
16:53
SPEAKER_02: So I think the question really on people's minds now is like, how should I be thinking about that?
16:58
SPEAKER_02: You know, and a lot of times we think about a lawsuit, legal contingency, our immediate reaction is, well, that's that's a contingency, old FAS5, ASC 450.
17:09
SPEAKER_02: I think it's important to take a step back and really think about what we're dealing with here.
17:13
SPEAKER_02: To me, it's more of a question of what is the law.
17:16
SPEAKER_02: And so we have tariffs that were imposed.
17:18
SPEAKER_02: That's obviously there's some challenge to that, but they've been imposed, they've been enforced by customs and border protection.
17:24
SPEAKER_02: Companies have been paying those tariffs, in many cases, maybe working out ways to pass some of those costs on or share some of that burden.
17:31
SPEAKER_02: So that's sort of behind us.
17:34
SPEAKER_02: We know what happened, goods were imported, they were of the particular origin or nature that subjected them to a tariff, the tariff was paid.
17:42
SPEAKER_02: There's not really a contingency.
17:44
SPEAKER_06: Agreed.
17:45
SPEAKER_02: Right?
17:45
SPEAKER_02: We have a law, we've been complying with it.
17:47
SPEAKER_02: So I think of it more like a legal obligation or a question of what is the law.
17:52
SPEAKER_02: So what we're waiting for is for the Supreme Court to tell us that either the law is what we think it is or it's something else.
18:00
SPEAKER_02: And when that happens, that will be effectively a change in the law that will deal with when it happens.
18:07
SPEAKER_02: So I think the other thing that often comes up is like, what do you think about from a subsequent event standpoint?
18:12
SPEAKER_02: That means it's a non-recognized subsequent event.
18:15
SPEAKER_02: It's an event in that period.
18:17
SPEAKER_06: Yeah.
18:17
SPEAKER_06: Yeah.
18:18
SPEAKER_06: I think you'd have to have overwhelming evidence to overcome why it's not law at this point.
18:23
SPEAKER_06: And I think it would probably be difficult for someone to demonstrate that.
18:26
SPEAKER_02: I mean, to me, there could be situations where perhaps there's some ambiguity as to whether I was actually conducting activities that should have subjected me to the tariff.
18:35
SPEAKER_02: But typically the way those work is they happen, you know, upon import, and you can't get your goods out of customs until you comply.
18:43
SPEAKER_02: So there's not even a question of like, hey, I didn't pay it because I didn't think I had to.
18:48
SPEAKER_02: Got it.
18:49
SPEAKER_06: So, Pat, what else from a financial reporting perspective should people be thinking about relative to tariffs?
18:53
SPEAKER_02: Yeah.
18:53
SPEAKER_02: So maybe in just a bit of a refresher on this, um, tariffs are a cost of whatever you bought.
19:00
SPEAKER_02: Yeah.
19:00
SPEAKER_02: A lot of times that'll be inventory, so it becomes part of your inventory cost.
19:04
SPEAKER_02: If inventory costs increase, you could potentially end up with a lower of cost or net realizable value issue, meaning I won't be able to recover my cost because I've already got a selling price that's less than that total cost.
19:18
SPEAKER_02: So you need to definitely think about how those tariffs could influence your inventory valuation assessment at each period end.
19:26
SPEAKER_02: That's a little bit of a unique model in GAP.
19:28
SPEAKER_02: It's very old-fashioned, but it basically does allow you to sort of look at what's happening after the balance sheet date as you're making that judgment about what your inventory is worth at the balance sheet date.
19:40
SPEAKER_02: So you have some flexibility there.
19:43
SPEAKER_02: Um, you could also be buying capital goods that are subject to a tariff.
19:47
SPEAKER_02: So in that case, it becomes part of the cost of the PPE.
19:50
SPEAKER_02: So that just then gets added to cost base, we'll end up in depreciation over time.
19:55
SPEAKER_02: And then I guess the one other place where there's a little bit of a difference is if you're dealing with a model in gap where there's a need to think about the future, like think about impairment assessments where you're doing future cash flow forecasts, perhaps even fair value evaluations.
20:14
SPEAKER_02: A lot of times you have to think about what might happen with those future tariffs.
20:18
SPEAKER_02: So we just talked about how tariffs are really a question of law.
20:20
SPEAKER_02: Yep.
20:21
SPEAKER_02: This is a situation where, well, you know, things can change in law, and people in the market might think that things could change.
20:27
SPEAKER_02: So you need to contemplate what those future events might be as you're thinking about valuation or cash flow scenarios.
20:34
SPEAKER_03: Yeah, pal, we see that a lot in the goodwill area.
20:37
SPEAKER_06: Yeah, and I think that's right.
20:38
SPEAKER_06: People have to sort of get in the mind of a market participant and try to figure that out.
20:42
SPEAKER_06: And that might be different than their conclusion relative to the likelihood of the Supreme Court case going through, right?
20:48
SPEAKER_06: So it's a judgment people are gonna have to make and suggest that people really stay tuned on all these um events, particularly around the subsequent events, to make sure your story is holding together and and you're comfortable.
20:59
SPEAKER_06: And I think it's gonna be critical to have good communication across the organization.
21:02
SPEAKER_06: So you're really assessing those things and you're making the right judgments.
21:05
SPEAKER_02: Trevor Burrus, Jr.
21:05
SPEAKER_02: And I know you're always a big fan of uh good, transparent disclosure.
21:09
SPEAKER_02: I am a big fan of that.
21:11
SPEAKER_02: Anytime you're dealing with things that are significant and potentially subject to uncertainty, um, there's actually some gap that requires disclosure of significant risks and uncertainties under ASC 275.
21:23
SPEAKER_02: A lot of times we think maybe that stuff really only ends up in the mDNA, but there is gap that requires some of that in the in the financial statements as well, certainly to the extent they affect any important accounting estimates, then you need to pick those up as well.
21:36
SPEAKER_02: Trevor Burrus, Jr.
21:36
SPEAKER_06: Great.
21:37
SPEAKER_06: Well, I appreciate that.
21:38
SPEAKER_06: So let's go to crypto.
21:40
SPEAKER_06: Okay.
21:41
SPEAKER_06: There's been a lot of movement in crypto, a lot of activity on that front, a lot of new investments.
21:46
SPEAKER_06: There's no tariffs on crypto.
21:47
SPEAKER_06: Trevor Burrus, Jr.
21:47
SPEAKER_06: There's no tariffs on crypto yet.
21:49
SPEAKER_06: Um but look, let's spend a little bit of time on crypto.
21:52
SPEAKER_06: So the Fans became out their standard on crypto a while back.
21:55
SPEAKER_06: Um we're seeing more people invest in crypto.
21:58
SPEAKER_06: We're starting to see the evolution of standards.
22:00
SPEAKER_06: Stablecoins, post the Genius Act, and we'll see probably more activity in that.
22:04
SPEAKER_06: On crypto, what should people be thinking about, particularly if they're new to this space?
22:08
SPEAKER_03: Yeah, I think if they're new to this space, it's going to be a lot of the same themes about reading the final contract.
22:13
SPEAKER_03: Maybe you don't have a contract, maybe it's a smart contract, maybe you just have your T's and C's, but it's really important to read what you have to understand the rights that that crypto that you're holding gives you, because that's gonna really drive the accounting and what model you're in.
22:26
SPEAKER_03: You might be in a fair value model, you might be in a traditional intangible asset model, you could be in the new standard that you just alluded to.
22:32
SPEAKER_03: So you really have to get into the details.
22:35
SPEAKER_06: Yep.
22:35
SPEAKER_06: Yep.
22:36
SPEAKER_06: That that makes a lot of sense.
22:37
SPEAKER_06: And I think there's a lot of terminology in the crypto space.
22:40
SPEAKER_06: And so wrapping your mind around what the features are, what they mean, how do they throw off economics and rights and transferability, all those types of things gets really challenging.
22:50
SPEAKER_06: So can you share a little bit more around those different models and how that affects your accounting?
22:55
SPEAKER_03: Yeah.
22:56
SPEAKER_03: So let's start, right?
22:57
SPEAKER_03: If you've got a crypto asset, you mentioned the Genius Act, so a stablecoin that gives the holder a right to cash, then you're gonna meet the definition of a financial asset.
23:07
SPEAKER_03: We're gonna be in the financial asset model, we're gonna record that crypto at fair value and market to fair value each reporting period.
23:13
SPEAKER_03: Got it.
23:14
SPEAKER_03: If you've got an asset that is in the scope of the new standard, so let's talk about what 35060 said.
23:19
SPEAKER_03: It said, okay, if you meet six criteria, so you've got fungible crypto, it's an intangible, it's on the blockchain, it's got the cryptography, you haven't created it or your related party hasn't created it, and and maybe the most important one in my mind, and the crypto does not give you a right or an enforceable right to a good or service.
23:39
SPEAKER_06: Got it.
23:40
SPEAKER_03: So that's kind of interesting, right?
23:41
SPEAKER_03: Because we're saying we've got an asset, but it doesn't give us a right to anything.
23:44
SPEAKER_03: But it was really meant to deal with it.
23:46
SPEAKER_06: It begs the question of who's investing in this, right?
23:48
SPEAKER_03: Trevor Burrus, Right.
23:48
SPEAKER_03: A lot of people, because I think there's some people who will say that some of these things, like a Bitcoin or uh ETH, there's a collective belief in the value.
23:56
SPEAKER_03: And so those are the assets that this standard was meant to include.
24:01
SPEAKER_03: And it did require that those assets be recorded at fair value with the mark-to-market each period to fair value.
24:07
SPEAKER_03: Trevor Burrus, Jr.
24:08
SPEAKER_06: Got it.
24:08
SPEAKER_06: Got it.
24:08
SPEAKER_06: Well, that that's helpful.
24:09
SPEAKER_06: And I know the the FASB has taken on a couple of projects to maybe expand the scope of the crypto assets.
24:15
SPEAKER_06: And so I guess we'll look for that to include things like wrap tokens.
24:17
SPEAKER_03: Trevor Burrus, Jr.: Wrap tokens and maybe receipt tokens and those sorts of things.
24:21
SPEAKER_03: Because really a wrap token, right, just gives you a right to the token that was in scope already.
24:26
SPEAKER_03: So it's a little bit odd that once you just wrap it, which really only allows you to use the token on a different chain that g that gets you out of scope.
24:33
SPEAKER_03: But if but for people that have that today, because you are out of scope, that's when you get into that traditional intangible asset model, which means you're at cost down to impairment without that ability to get it.
24:44
SPEAKER_06: Completely different model.
24:45
SPEAKER_06: Yes.
24:46
SPEAKER_06: And so that has its own challenges, right?
24:48
SPEAKER_06: Because it's a one-way model as well, right?
24:50
SPEAKER_06: So you'll mark down if you've got an impairment.
24:52
SPEAKER_03: Right.
24:52
SPEAKER_03: And then not back up.
24:53
SPEAKER_03: And so yeah, they're looking to take that on and also to really provide some additional guidance around derecognition.
24:59
SPEAKER_06: Yes.
25:00
SPEAKER_06: Yeah, which I know has been a hot topic.
25:02
SPEAKER_06: And then I guess the last piece, uh, maybe clarifying a little bit about stable coins and when those could be uh cash equivalents as well, right?
25:10
SPEAKER_06: We expect them to maybe issue a statement on that.
25:12
SPEAKER_06: That's right.
25:14
SPEAKER_06: Great.
25:14
SPEAKER_06: Uh appreciate that update.
25:16
SPEAKER_06: Um let's talk a different area, um, which is really the evolution of private credit, right?
25:21
SPEAKER_06: We've seen the private credit markets just expand over the past years, uh, where private credit's really filling the gap or holes where you know traditional banks can't really provide uh credit um in an efficient way, actually, to borrowers.
25:37
SPEAKER_06: So so Brett, we're we're seeing a lot of issues and questions around private credit.
25:40
SPEAKER_06: What makes these deals so unique?
25:42
SPEAKER_05: Yeah, I think you're right.
25:43
SPEAKER_05: It's really become a significant player in the general financing environment.
25:47
SPEAKER_05: Um, and when we talk about private credit, I think it's important to understand like what are we talking about, right?
25:52
SPEAKER_05: And there's a lot of different definitions around and how people are using that term.
25:57
SPEAKER_05: When I think of private credit, I just think of it simply as a financing arrangement that's negotiated directly with a non-bank lender.
26:04
SPEAKER_05: That may be a private equity affiliate, it may be an investment firm, maybe an insurance company or other types of financial or non-financial institutions.
26:13
SPEAKER_05: What makes them stand out in my mind is they're typically customized, you know, bilateral transactions with pretty individually negotiated terms.
26:20
SPEAKER_05: Got it.
26:21
SPEAKER_05: And we're seeing more and more of these um transactions in the market, I think for a couple of reasons.
26:26
SPEAKER_05: Companies like them because they offer speed.
26:28
SPEAKER_05: They often move a lot faster than traditional bank financing.
26:32
SPEAKER_05: And also they provide flexibility.
26:34
SPEAKER_05: You see a lot of uh very tailored terms to a borrower's specific needs, and that may be around timing, or around structure or collateral.
26:43
SPEAKER_05: To be fair, it's all structured credit or all private credit is not necessarily super complex.
26:49
SPEAKER_05: Some of it is just a plain vanilla.
26:51
SPEAKER_05: Yeah, plain vanilla loan, right?
26:52
SPEAKER_05: Yeah.
26:53
SPEAKER_05: Some of it is um similar to what we've seen in bank structures with asset-based lending.
26:58
SPEAKER_05: It's just with a new lender.
27:00
SPEAKER_05: And some of the structures we see are very tailored, meeting trying to meet very specific objectives.
27:05
SPEAKER_05: Got it.
27:05
SPEAKER_05: Seems like you probably need to read the final contract.
27:08
unknown: Sure, right.
27:08
SPEAKER_06: Definitely need to.
27:09
SPEAKER_06: That's that's a that's a fair point.
27:11
SPEAKER_06: So so there's uh if I think about these transactions, the ones that are more highly structured, right?
27:16
SPEAKER_06: There's different objectives, generally speaking, right, between the borrower and the private credit provider.
27:21
SPEAKER_06: What are some of the things that people should be thinking about and how that might influence the accounting?
27:27
SPEAKER_06: Yeah.
27:27
SPEAKER_05: It's a great question.
27:28
SPEAKER_05: I think one of the things, a good example of this dynamic, is that the investor and the borrower can come to a deal with having very different objectives, right?
27:37
SPEAKER_05: Uh a private credit investor may be looking for debt-like cash flows.
27:41
SPEAKER_05: They want certainty, especially if they've issued debt themselves to finance that investment.
27:47
SPEAKER_05: On the flip side, the borrower may be looking for something that has more flexibility and that may qualify as a permanent equity issuance for financial reporting purposes.
27:58
SPEAKER_05: So we're trying to, we see companies trying to bridge these differences between those objectives.
28:03
SPEAKER_05: Um, and sometimes they structure them through new legal entities or using existing legal legal entities.
28:09
SPEAKER_05: And that structuring decision isn't just about economics, it has real accounting implications, starting with whether that financing entity has to be consolidated or not.
28:18
SPEAKER_06: Got it.
28:18
SPEAKER_06: And so let's get back.
28:20
SPEAKER_06: You mentioned one thing about permanent equity.
28:21
SPEAKER_06: If if the if the entity is consolidated, what are some of the considerations people need to think about to decide whether or not sort of the private credit investment that's going through this entity is, you know, either a liability or equity?
28:36
SPEAKER_05: Yeah.
28:36
SPEAKER_05: I think that starts with an assessment based on two things.
28:39
SPEAKER_05: One, the legal form of the instrument, and also any embedded features and payment terms it may include.
28:46
SPEAKER_05: So some instruments we see are in the legal form of debt.
28:49
SPEAKER_05: So they grant the investor creditor rights.
28:52
SPEAKER_05: These are generally falling under ASC 470 and are accounted for as liabilities.
28:56
SPEAKER_05: But it's not always that straightforward because we also see instruments that are issued in legal form equity.
29:02
SPEAKER_05: Got it.
29:03
SPEAKER_05: Like preferred stock.
29:04
SPEAKER_05: Like preferred stock, for example.
29:06
SPEAKER_05: Um, but they may be accounted for as liabilities because they're considered mandatorily redeemable under ASC 480.
29:13
SPEAKER_05: Let me give you an example.
29:14
SPEAKER_05: Like a share instrument may be classified as liability when there's an unconditional obligation to redeem the instrument by transferring assets, maybe on a specific date, maybe a determinable date, or it may be an event that's certain to occur.
29:29
SPEAKER_05: Got it.
29:29
SPEAKER_05: So it's effectively like a maturity.
29:31
SPEAKER_05: Exactly.
29:32
SPEAKER_05: In contrast, I could have an instrument that's only conditionally redeemable based on an event that's not certain to occur.
29:38
SPEAKER_05: And that would not be classified as a liability.
29:41
SPEAKER_06: And so when they are liabilities, what are sort of the accounting models or results of that?
29:45
SPEAKER_05: So um there's a couple, and it's going to depend on on whether those payment terms are fixed or variable.
29:51
SPEAKER_05: And you could end up in a fair value model or you could uh come up, you could end up in an accreted value model.
29:57
SPEAKER_05: Got it.
29:57
SPEAKER_05: I'm and I'm sure everyone would hate the fair value model.
30:00
SPEAKER_05: Not not very probably.
30:02
SPEAKER_05: Although we do see some in some situations where the the accreted value is model is so complex that companies actually just elect the fair value value.
30:12
SPEAKER_05: Fair value option for anyway.
30:13
SPEAKER_06: Got it, got it.
30:14
SPEAKER_06: So so if you don't meet the criteria for liability, you've got something that's an equity.
30:20
SPEAKER_06: Um I know mezzanine classification, um particularly for those that are SEC registrants and and many private companies who follow that guidance as well.
30:28
SPEAKER_06: What are some of the considerations there that they need to make?
30:31
SPEAKER_05: Right.
30:31
SPEAKER_05: So mezzanine equity applies for SEC registrants, like you, like you mentioned, um, and it it applies when an instrument isn't a liability, but it's redeemable for cash or other assets, and that redemption is outside of the issuer's control.
30:45
SPEAKER_05: So we see this a lot in private credit deals.
30:48
SPEAKER_05: An investor may negotiate a put a put right or a redemption option, uh, or may specify that the redemption is triggered by certain events.
30:56
SPEAKER_05: And even though these events are rare, if they're outside the company's control, that instrument may need to be classified in mezzanine.
31:03
SPEAKER_05: So the complexity here is accounting teams need to think carefully about all the different provisions, likely or not, where the redemption uh could be required.
31:12
SPEAKER_05: And it may be through a formal put, like a right in the contract, or it may uh even exist through rights like board, like board control.
31:22
SPEAKER_05: Uh, if none of those redemption features are present, meaning that you have full control, there's no obligation to redeem, then the instrument may get to permanent equity.
31:31
SPEAKER_05: But we find that that analysis is long and labored in order to get to that conclusion.
31:36
SPEAKER_06: Yeah, I guess just from my experience, it's really difficult for many preferred stock arrangements in these types of transactions to get the permanent equity.
31:43
SPEAKER_06: So if you think you have one, make sure you're getting the right people involved.
31:46
SPEAKER_06: And I and I agree this is a real complex area of gap and one that you really want to engage the right people to get involved with and certainly get involved early with your treasury departments or others on these transactions to really understand those features.
32:00
SPEAKER_06: So anything else from that front that we want to cover?
32:04
SPEAKER_06: We've we've spent a lot on the structuring of it, the liability versus mezzanine.
32:08
SPEAKER_06: Anything else uh that people should keep in mind?
32:10
SPEAKER_05: Maybe a couple of things come to mind.
32:11
SPEAKER_05: Um, one, these deals often include equity link features like warrants.
32:16
SPEAKER_05: Uh in those cases, it's important to evaluate um whether that instrument is freestanding or embedded, and then determine the appropriate balance balance sheet classification and treatment for that.
32:26
SPEAKER_05: And then I'd wrap up again with disclosures, knowing you're a big fan of disclosures.
32:30
SPEAKER_05: These are complex deals and often they're significant sources of financing.
32:34
SPEAKER_05: And so making sure that however the arrangement is counted for, that disclosures are transparent and clear about what the arrangement is and what the payment provisions are, uh, is always important.
32:44
SPEAKER_06: Yeah, and I've actually um uh spoken to many that are in the uh credit communities who are really focused on these transactions, a highly structured one, making sure they really understand them and understand what the impact could be on issuers.
32:57
SPEAKER_06: So I agree with that, Brad.
32:59
SPEAKER_06: Really important stuff.
33:00
SPEAKER_06: So let's turn to everyone's most hated subject, taxes.
33:05
SPEAKER_06: No one likes to pay them, no one likes to account for them.
33:08
SPEAKER_06: Uh a lot of news this this year.
33:09
SPEAKER_06: We had the one big beautiful bill uh that's out there.
33:13
SPEAKER_06: Um Pat, for for our listeners today, could you sort of summarize some of the more significant provisions um that businesses have been focusing on relative to the One Big Beautiful Bill?
33:23
SPEAKER_02: Sure.
33:24
SPEAKER_02: And I would say for the most part, um, the One Big Beautiful Bill Act was taxpayer friendly for corporates.
33:31
SPEAKER_02: Um there wasn't a rate change.
33:33
SPEAKER_02: Um that might have been the biggest thing.
33:35
SPEAKER_02: And that's one of the things that gets a lot of the accounting attention, at least when there's a change in tax law.
33:41
SPEAKER_02: So we didn't have that.
33:42
SPEAKER_02: So you might think, okay, well, not that much to do.
33:46
SPEAKER_02: Well, there are some things you need to be thinking about, especially as we head into the end of the year, because what's really happening is your profile of some taxable income is going to change going forward, and the profile of some of your deferred taxes uh may change as well.
34:00
SPEAKER_02: So just sort of plant that seed.
34:02
SPEAKER_02: In terms of the big changes, um, the most significant ones were the ability to expense capital expenditures, you know, rather than capitalizing and depreciating them, you can actually take what they call 100% bonus depreciation on any assets that were placed in service after January 19th of 2025.
34:21
SPEAKER_02: So you can actually go back to any of those assets you'd already purchased this year, put them in service after January 19th, and you can essentially expense those.
34:29
SPEAKER_02: So real incentive for capital capital investment, right?
34:34
SPEAKER_02: Um so that's a big one.
34:37
SPEAKER_02: Obviously, um that will have an impact on your deferreds going forward because obviously nothing changes for gap purposes.
34:44
SPEAKER_02: So your gap basis in your assets is going to be much higher than your tax basis, you're gonna have deferred tax liabilities associated with all of those.
34:51
SPEAKER_02: Um the other one is um the ability to now expense immediately, again, sort of going back to where we were before the Tax Cuts and Jobs Act for uh research and development expenditures.
35:04
SPEAKER_02: So under Section 174, right now, or previously rather under the Tax Cuts and Jobs Act of 2017, we were in a phase where you had to capitalize those expenditures and amortize them over five years.
35:17
SPEAKER_02: Got it.
35:17
SPEAKER_02: Um now you have the ability to expense them as they're incurred or deduct them on your tax return as incurred.
35:22
SPEAKER_02: You always have to expense them for book purposes, right?
35:25
SPEAKER_02: Um you have an alternative though, and this might be relevant for tax planning.
35:29
SPEAKER_02: Um, you can you can still capitalize them, and you have two choices then.
35:34
SPEAKER_02: You can capitalize them over the life of the related research project, but that can't be less than five years.
35:41
SPEAKER_02: Or you can just default to capitalize and amortize over 10 years.
35:46
SPEAKER_02: Got it.
35:46
SPEAKER_02: So you have those choices, which you know might matter if you're trying to optimize, you know, some other um aspects of your tax profile in a given period.
35:55
SPEAKER_02: That only relates to domestic RD.
35:57
SPEAKER_02: Anything that sort of happens outside the US that gets swept back into the U.S.
36:01
SPEAKER_02: tax net through some of these foreign provisions still technically gets capitalized and amortized over 15 years.
36:07
SPEAKER_06: Got it.
36:08
SPEAKER_06: So it's a real, I'll call it America first uh policy relative to that provision.
36:13
SPEAKER_06: Yeah.
36:13
SPEAKER_06: How how about from an just staying on maybe on the international front, any other impacts from an international perspective?
36:19
SPEAKER_06: Sort of the impact of the of the bill?
36:21
SPEAKER_02: Yeah.
36:21
SPEAKER_02: So on the international front, um, there there were some tweaks to some of these foreign provisions like guilty and FDII uh and beat, but I would say nothing that's probably as significant as those couple of um domestic changes.
36:36
SPEAKER_02: And the one other change on the domestic front that's probably worth noting is the change in the the base on which you calculate how much interest expense you're allowed to deduct in a given period.
36:48
SPEAKER_02: Got it.
36:48
SPEAKER_02: Right now, the limitation, or right now, prior to the One Big Beautiful Bill Act, the limitation was um c it was 30% of adjusted taxable income.
36:58
SPEAKER_02: It's still 30% of adjusted taxable income, meaning that's the extent to which you can deduct interest up to that limit.
37:04
SPEAKER_02: The big change, though, was adjusted taxable income started with an EBIT base, so earnings before interest and taxes.
37:12
SPEAKER_02: The new base is an EBITDA base, so earnings before interest tax, depreciation, amortization, higher numbers, higher amount of interest that you can uh deduct now in a given period.
37:23
SPEAKER_02: Um, because a lot of companies were ending up with pretty large uh interest carry forwards.
37:27
SPEAKER_02: Because if you were limited and not being able to deduct all your interest, you would get a carry forward.
37:31
SPEAKER_02: But these were kind of growing depending on your financing structure.
37:35
SPEAKER_02: You were just sort of stuck in a spot where you were gonna have a hard time getting to that interest.
37:40
SPEAKER_02: Now you may be able to get to a lot more of that.
37:42
SPEAKER_02: So it can affect how you think about your valuation allowance uh going forward.
37:46
SPEAKER_06: Got it.
37:47
SPEAKER_06: So let's so we just talked a lot about the the changes in the law.
37:50
SPEAKER_06: Yeah.
37:50
SPEAKER_06: Some of the financial reporting considerations that people should be thinking about?
37:54
SPEAKER_06: Like how how does this impact things like the valuation allowance or other judgments that people might be making in taxes?
38:00
SPEAKER_02: Yeah, that that's really kind of the big one in terms of like I'll call it the immediate accounting consequences of the act, um, is just really thinking about how these changes are going to affect your valuation allowance.
38:11
SPEAKER_02: And the the one little maybe more nuanced point there is some of these changes, when you think taxpayer-friendly, it means it kind of helps you reduce taxable income.
38:21
SPEAKER_02: Well, we do have this um corporate alternative minimum tax or CAMT.
38:26
SPEAKER_02: So some companies are finding that they may end up being in that CAMT situation more persistently than they had been.
38:36
SPEAKER_02: And that can also have an impact then on how you think about your valuation allowance because you don't get the full benefit of some of your deferred taxes if you end up being in that situation.
38:47
SPEAKER_02: Now there's actually a policy choice you have to either peek ahead and figure out or think about whether you are going to be in that situation and bake that into your valuation allowance assessment, or like we do with the minimum taxes generally, just deal with that in the period.
39:04
SPEAKER_02: Just make it a period cost, right?
39:06
SPEAKER_02: But it's a policy choice, and you you might already have a policy.
39:10
SPEAKER_02: You might want to think about the policy if you haven't had that situation before.
39:14
SPEAKER_02: So that's an important one.
39:15
SPEAKER_02: But again, that's going to be more of like a valuation allowance question.
39:18
SPEAKER_02: And then I guess the the other big thing we have to deal with this year for the first time is the new effective tax rate reconciliation disclosures under the new FASB standard.
39:29
SPEAKER_02: And one of the specific line items that's required, again, subject to materiality, is the effective changes in tax law.
39:36
SPEAKER_02: Yeah.
39:37
SPEAKER_02: Sometimes there's a little debate about valuation allowance because there's a line for valuation allowance.
39:41
SPEAKER_02: We would say if the valuation allowance change is triggered simply because of the way the new tax law changed things, that should be part of your changes.
39:50
SPEAKER_06: Yeah.
39:50
SPEAKER_06: So you'd really have to isolate that portion of the change in the VA as a result of the change in the tax law.
39:57
SPEAKER_06: Yep.
39:57
SPEAKER_06: That makes a lot of sense to me.
39:59
SPEAKER_06: Well, great stuff.
40:01
SPEAKER_06: Before, you know, before we close, we talked about a lot of the, I'll call the big picture things we're seeing, you know, from a consultation perspective in our group.
40:10
SPEAKER_06: Why don't we just give each of you the opportunity to highlight anything else you would like to for for our listeners?
40:17
SPEAKER_06: So, Brett, let's start with you.
40:18
SPEAKER_05: Tom, I'd probably talk about a couple of new ASUs that were issued late in the year.
40:22
SPEAKER_05: Um, and I I raised them because they're fairly welcome changes for preparers.
40:28
SPEAKER_05: And also they all contain early adoption provisions that could be effective for the current year end.
40:33
SPEAKER_05: So companies need to think through whether they want to early adopt them.
40:37
SPEAKER_05: Uh the first is 202507, it was issued late September.
40:41
SPEAKER_05: Uh, and it actually narrows the scope of derivative accounting.
40:44
SPEAKER_06: Um I thought everyone loved derivative accounting.
40:47
SPEAKER_05: I didn't.
40:47
SPEAKER_05: I did too, but I'm trying to do that.
40:51
unknown: Yeah.
40:52
SPEAKER_05: Um specifically, it creates a new scope exception for contracts uh where uh the underlying is based on the operations or activities specific to one of the parties to the contract.
41:03
SPEAKER_05: Um and why is this important?
41:05
SPEAKER_05: There's many contracts today with contingent or index payment features that get thrown into derivative accounting, dealing with you know P ⁇ L volatility and all of that.
41:14
SPEAKER_05: And under these amendments, uh some arrangements, think of research and development funding arrangements, litigation financing arrangements, uh ESG linked contracts.
41:24
SPEAKER_05: Uh many of them will qualify for this new scope exception and don't need to be uh measured at fair value through earnings.
41:30
SPEAKER_06: So if you were marking them to market previously or recording them at fair value, there's an opportunity to adopt early and then go back and revise your prior financial.
41:39
SPEAKER_06: Exactly.
41:39
SPEAKER_05: Sort of get off the fair value chain.
41:41
SPEAKER_05: Exactly right.
41:41
SPEAKER_05: You could kind of go back um to early adoption um immediately this year.
41:45
SPEAKER_05: How how about hedge account?
41:46
SPEAKER_05: Yeah, how about hedge accounting?
41:47
SPEAKER_05: There's some changes there as well, right?
41:49
SPEAKER_05: Right.
41:49
SPEAKER_05: There are there are.
41:50
SPEAKER_05: There's um that was issued just late in November 2025-09 for those uh paying attention.
41:57
SPEAKER_05: There's five targeted areas to it that really get into the details of hedge accounting.
42:02
SPEAKER_05: Um and I think for active hedgers, they've been following this project.
42:06
SPEAKER_05: The reminder I make to people is that those changes are effective uh or can be early adopted as of the date that the ASU was issued in November.
42:16
SPEAKER_05: And so uh some hedgers will want to go through and and start to apply those amendments immediately.
42:22
SPEAKER_05: And it gives them a little more flexibility in some of their hedge accounting.
42:24
SPEAKER_06: That makes a lot of sense.
42:25
SPEAKER_06: And I guess with all of these, you should always consider SAB 74 disclosures and and sort of the adoption of those or and what the impact could be on the financial statements, which which obviously is something, something important.
42:38
SPEAKER_06: And always say when it comes to SAB 74, disclose what you know.
42:42
SPEAKER_06: And so if you've gone through an analysis and you're still thinking through how you might adopt some of these things or what have you, make sure that um you make all of those those disclosures.
42:52
SPEAKER_06: Beth, how how about you?
42:53
SPEAKER_03: Yeah, I guess I would go with um held-for-sale accounting.
42:56
SPEAKER_03: This time of year, we get a lot of questions when some but not all of the criteria are met.
43:01
SPEAKER_03: So maybe the level set for our listeners, ASC360 lays out six criteria, and I'll just maybe briefly recap them.
43:08
SPEAKER_03: First, management or uh others with the proper authority have committed to a plan to sell.
43:14
SPEAKER_03: Second, the assets are ready to be sold in their current condition.
43:17
SPEAKER_03: Um, there needs to be an active program to find a buyer.
43:21
SPEAKER_03: The sale must be probable of being closed within a year.
43:24
SPEAKER_03: They must be marketed at a reasonable price, so you can't be like fire sailing it out.
43:27
SPEAKER_03: And finally, it needs to be unlikely that the plan of sale will change or fall through to get to held for sale.
43:33
SPEAKER_03: And maybe just one nuance when people think about held for sale, sometimes you'll hear like we're gonna spin or sell, we're not sure.
43:39
SPEAKER_03: Well, for spin accounting or if you're gonna abandon, you cannot get to held for sale until you've actually committed consummated no not just the decision, but actually spun it out.
43:48
SPEAKER_06: Oh, okay.
43:49
SPEAKER_03: So you gotta wait.
43:50
SPEAKER_06: Got it.
43:50
SPEAKER_06: Got it.
43:51
SPEAKER_02: It's held for sale, not held until I stop using it.
43:54
SPEAKER_06: That's right.
43:54
SPEAKER_06: Got it.
43:55
SPEAKER_06: That's right.
43:55
SPEAKER_06: Got it.
43:56
SPEAKER_06: Well well, that makes sense.
43:56
SPEAKER_06: So so uh how about situations where things are happening close to The reporting date.
44:01
SPEAKER_06: I'd imagine the timing there can be tricky in how you're thinking about the analysis.
44:05
SPEAKER_03: Yeah, yeah.
44:06
SPEAKER_03: We do, right?
44:06
SPEAKER_03: We see like, well, we've met some of the criteria, but perhaps we're waiting for shareholder approval or board approval.
44:12
SPEAKER_03: That can usually be something that companies are waiting for.
44:15
SPEAKER_03: And that first criteria is management having the appropriate authority commits to a plan to sell.
44:20
SPEAKER_03: And sometimes in the company's articles in corporation or just in their board governance, board really has to commit to the plan to sell.
44:28
SPEAKER_03: So you've got to get that board meeting.
44:29
SPEAKER_03: And let's say that happens January 2nd or January 5th.
44:31
SPEAKER_03: People call and say, well, can I get to held for sale at year end?
44:34
SPEAKER_03: And you cannot.
44:34
SPEAKER_03: The guidance is actually pretty clear here.
44:36
SPEAKER_03: Criteria must be met at the balance sheet date to get for held for sale accounting, which has ramifications on measurement because held for sale is a lower of cost or fair value, less cost to sell.
44:47
SPEAKER_03: If you stay in the held for use model, you do want to think about whether or not this plan to sell is a trigger.
44:52
SPEAKER_03: There's some guidance in the both the Goodwill standard and in 360 long-lived assets that talks about a trigger being a more likely than not sale of a business.
45:03
SPEAKER_03: And so you'll have to think about am I thinking I'm going to sell it?
45:05
SPEAKER_03: Do I think I'm going to sell it at a loss?
45:07
SPEAKER_03: That could be a trigger to do those tests.
45:09
SPEAKER_03: In that case, you're often running that impairment test using an expected cash flow model where you probability weight the different scenarios to figure out whether or not you trip the recoverability test and then need to go to the impairment test for 360 assets, or when you just do your fair value versus carrying value for goodwill, do you have in fact an impairment?
45:27
SPEAKER_06: Trevor Burrus Got it.
45:27
SPEAKER_06: So a lot to consider.
45:29
SPEAKER_06: One thing you should really be thinking about is do you have controls around significant transactions and who has to approve them?
45:34
SPEAKER_06: That might be part of the analysis as well that you want to get ahead of understand what sort of what the toll gate is relative to the accounting.
45:40
SPEAKER_06: Trevor Burrus, Jr.
45:40
SPEAKER_03: Right.
45:40
SPEAKER_03: And I always tell people document what you know when you know it, and also then to your point, and then disclose the right stuff.
45:46
SPEAKER_03: But the documentation is key too, because in the moment you kind of know, but if you wait, you may not remember like when did this meeting or when did this approval come or what did we think was probable when.
45:56
SPEAKER_03: So you know, the company having those controls around documentation is so key.
45:59
SPEAKER_03: Trevor Burrus, Jr.
46:00
SPEAKER_06: Great, great point.
46:01
SPEAKER_06: Pat, how about how about you?
46:02
SPEAKER_06: How about in your world?
46:03
SPEAKER_02: Yeah.
46:03
SPEAKER_02: So well, I do love taxes, Tom.
46:05
SPEAKER_02: So I'm going to go back to taxes.
46:06
SPEAKER_02: Except paying them, right?
46:09
SPEAKER_02: We didn't uh we talked about the one big beautiful bill that's kind of U.S.
46:13
SPEAKER_02: tax law.
46:14
SPEAKER_02: The other big thing that's happening in the tax space is um the OECD activities around their pillar two or their kind of global minimum tax concept.
46:24
SPEAKER_02: Um that obviously has been in play now for a couple of years.
46:27
SPEAKER_02: It's sort of being phased in.
46:29
SPEAKER_02: Um, but one of the big things that's in play right now is um what uh is referred to as um, well, there's a couple of provisions under the OECD framework called the undertaxed profits rule or the income inclusion rule.
46:43
SPEAKER_02: And these are a couple of provisions that basically would give some other country in the OECD realm, if they've enacted such provisions in their laws, to collect taxes on the income of, for example, a US business, even if they don't really own that U.S.
47:03
SPEAKER_02: business.
47:03
SPEAKER_02: So, like a sister company in another jurisdiction.
47:06
SPEAKER_02: In theory, that jurisdiction would have the ability to collect tax on the U.S.
47:10
SPEAKER_02: income.
47:11
SPEAKER_02: Now, there were some threats in the uh lead up to the one big beautiful bill that the U.S.
47:16
SPEAKER_02: was gonna enact some retaliatory measures to prevent this from happening.
47:20
SPEAKER_02: Those didn't make it into the final bill, but I think they put some of the other OECD countries on notice that like we're not really gonna play that game, I guess.
47:29
SPEAKER_02: Right.
47:29
SPEAKER_02: Um So there's we're expecting some guidance from the OECD that will essentially take those uh mechanisms out of the pillar two framework, the tax.
47:42
SPEAKER_02: For US companies, for U.S.
47:44
SPEAKER_02: companies or U.S.
47:45
SPEAKER_02: parented groups, right?
47:47
SPEAKER_02: Um The tricky part is one, we don't have that guidance yet, whether we get it before the end of 2025 or not remains to be seen.
47:56
SPEAKER_02: But what likely is not going to happen before the end of 2025 is all of the various member countries need that have already enacted laws that include those provisions would in theory need to go change their laws, right?
48:11
SPEAKER_02: Because we account for taxes based on the enacted tax laws.
48:15
SPEAKER_02: As we've talked before, the OECD, it's the Organization of Economic Cooperation and Development, it's a group of countries, they have a framework they agree to, but that doesn't really count for anything.
48:26
SPEAKER_02: The countries themselves have to go and enact laws.
48:29
SPEAKER_02: And until that happens, you have to account for the laws that are on the book.
48:33
SPEAKER_02: So it does create some tension because there could be a window as we head into 2026 and some of these provisions start to kick in.
48:41
SPEAKER_02: There's a safe harbor that sort of suspends them until 2026.
48:45
SPEAKER_02: But there could be a window where we have laws on the books in various countries that say UTPR could be collected, even though the OECD has sort of said we don't think that flies.
48:58
SPEAKER_06: So it's sort of like the the um the expectation is even though the law would technically apply in 2026 to certain jurisdictions, they will unlikely enforce it as a result of them ultimately adopting the tax.
49:10
SPEAKER_06: So I guess we'll have to see what happens, both what's in the statement and how those things ultimately get enacted, because that'll affect the timing of the uh the accounting and financial reporting.
49:18
SPEAKER_06: Yeah, that could get kind of ugly.
49:20
SPEAKER_06: Yes.
49:21
SPEAKER_06: So stay tuned on that, I guess.
49:23
SPEAKER_06: Great.
49:23
SPEAKER_06: Well, listen, Beth, Pat, Brett, I really appreciate you all making your time and sharing your perspectives with us.
49:29
SPEAKER_06: I I think there'll be some great observations for everyone as we head into your end.
49:33
SPEAKER_06: So thanks again.
49:33
SPEAKER_00: Thanks, Robin.
49:35
SPEAKER_06: Thanks, Tom.
49:36
SPEAKER_00: That's our show for today.
49:38
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49:41
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49:44
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49:48
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49:58
SPEAKER_00: From Thought Leadership at PWC, I'm Heather Horn.
50:02
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50:14
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