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Year-end toolkit: New standards effective in 2025 · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PwC's National Office.
• 0:06
  SPEAKER_01: Hello, and welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_01: I'm Heather Horn.
• 0:11
  SPEAKER_01: Today is the final episode of our year-end toolkit series, but also a great one to really kick off the rest of our year because it's an important topic for anyone involved in accounting and reporting, an update on new accounting standards.
• 0:25
  SPEAKER_01: A new year, of course, means that there are new FASP standards effective.
• 0:29
  SPEAKER_01: This year they range from guidance on joint ventures to cryptocurrency to profit interest awards.
• 0:36
  SPEAKER_01: In today's episode, we'll get you up to speed and provide an overview of the new standards.
• 0:41
  SPEAKER_01: And of course, don't forget that the impact of adopting new standards may also need to be disclosed in your 2024 financial statements.
• 0:51
  SPEAKER_01: Back for today is Kyle Moffat, PWC's National Office Professional Practice Group Leader and the guest host for the series.
• 0:59
  SPEAKER_01: Kyle's joined by Jay Celeber, a partner in PWC's National Office who's been closely following the new guidance.
• 1:06
  SPEAKER_01: With that, let's start the episode.
• 1:08
  SPEAKER_02: Hello and welcome to our podcast.
• 1:10
  SPEAKER_02: Today we'll be talking about a number of accounting standards with upcoming effective dates in 2025.
• 1:15
  SPEAKER_02: We've obviously covered a lot in our podcast over the last few weeks with respect to 2024.
• 1:22
  SPEAKER_02: Interestingly, these standards uh cover a broad range of topics, and that's why I have Jay Celeber here with us today.
• 1:29
  SPEAKER_02: Um Jay is a partner in the National Office who I consider, and I think many other others consider to be a jack of all trades, um, pretty broad understanding of pretty much anything, and always my go-to guy, um talks to a lot of clients, engages in a lot of CPE sessions.
• 1:44
  SPEAKER_02: And so it's it's great to have you here, you know, perfect to have you to share with us kind of your your thoughts on these various accounting standard updates.
• 1:52
  SPEAKER_02: And they you and I were talking just before this, where we were saying there's it's kind of a little bit all over the place, um, the topics, but I think um certainly is is is worth spending a little bit of time on on each of these.
• 2:03
  SPEAKER_02: Um certainly expect that that these were earn-impact uh companies moving forward.
• 2:07
  SPEAKER_02: So to start, Jay, can you just provide a quick overview of some of the key standards effective in 2025 for calendar year end companies and which ones we plan on addressing today?
• 2:18
  SPEAKER_03: Sure.
• 2:19
  SPEAKER_03: Well, first, thanks for having me here today, Kyle, and for the great introduction.
• 2:23
  SPEAKER_03: I certainly uh appreciate the uh the compliment.
• 2:26
  SPEAKER_03: Today, we were planning to talk about four relatively newer standards in this podcast, and that's joint venture formation, cryptocurrency, profits interests, and investments in tax credit structures.
• 2:40
  SPEAKER_03: And we'll go get into what each of those mean.
• 2:42
  SPEAKER_03: Those are those are some cryptic words in some cases, but we'll get into each of those as we go along here today.
• 2:47
  SPEAKER_03: Uh, you know, maybe before getting into these, I'll I would mention there's a few other standards that are effective in 2025 as well that we're not going to cover on this podcast.
• 2:57
  SPEAKER_03: One of those is on long-duration insurance contracts, which is a little bit more industry specific, so we're not gonna talk about it in a broad approach here.
• 3:05
  SPEAKER_03: And the other is improvement to income tax disclosures, but we've covered that in some other podcasts that we weren't gonna talk about again here.
• 3:12
  SPEAKER_03: You know, probably maybe a good spot to plug here that uh on Viewpoint, we have a landing page with that lists all of the effective dates of all of the guidance, kind of for both public and non-public entities, and links to the guidance itself and other resources we have.
• 3:28
  SPEAKER_03: So and we keep that updated.
• 3:30
  SPEAKER_03: So it's a good resource, I think, for our listeners uh to keep up to date on when these new standards will be effective for them.
• 3:38
  SPEAKER_02: That's a great point.
• 3:38
  SPEAKER_02: And and we will include a link to that in the show notes.
• 3:42
  SPEAKER_02: Why don't we dive in and start with the the oldest of the bunch uh in our program today, and that is ASU 2023-05 on joint venture formations.
• 3:52
  SPEAKER_02: I can tell you that um I was happy to see um that this was tackled uh by the FASBE and certainly interested in kind of what you have to say on the topic.
• 4:02
  SPEAKER_02: Can you tell us a little bit more about this one?
• 4:04
  SPEAKER_03: Yeah, sure.
• 4:04
  SPEAKER_03: Sure.
• 4:04
  SPEAKER_03: Maybe I'll start with the scope, because it is a little bit narrower than maybe people think.
• 4:09
  SPEAKER_03: It only applies to the financial statements of the joint venture itself and only at the time of its formation.
• 4:16
  SPEAKER_03: So it does not change any of the accounting or touch any of the accounting by the parties who contribute the assets into the joint venture, and it also doesn't cover any subsequent transactions between the parties after the initial formation of the of the JV.
• 4:32
  SPEAKER_03: Uh you know, as you said, it it was before this came out, there was there was no authoritative guidance in U.S.
• 4:38
  SPEAKER_03: GAAP that addressed how a joint venture, when it got started, should recognize all the contributions it receives.
• 4:45
  SPEAKER_03: And as a result of that, there had been diversity in practice, some of that driven by some SEC feedback as well or perspectives.
• 4:51
  SPEAKER_03: Uh but many joint ventures accounted for the contributions they received at the carryover basis from the venturers, but others were reported at fair value.
• 5:03
  SPEAKER_03: So the FASBI took on this project to try to standardize that.
• 5:06
  SPEAKER_03: And under this new guidance, a joint venture, when it's formed, it is going to be measuring all of the net assets that it were contributed to the joint venture as of the formation date at new basis.
• 5:20
  SPEAKER_03: Um, that sounds a lot like a business combination.
• 5:23
  SPEAKER_03: Um the FASBE was careful, we you know it leverages that a lot, but we're careful not to call it a business combination or an acquisition or use any of that terminology, because by definition, in a joint venture, one side isn't getting control of the other, given the joint control that has to exist here.
• 5:40
  SPEAKER_03: And the FASB didn't want to create any confusion in the overall models that we use for NUCOs that are part of a business combination.
• 5:48
  SPEAKER_03: Uh, by you know, they didn't want to say, for example, that the NUCO that's formed is gaining control of both sides of the venture here because that could create a lot of you know unintended consequences perhaps on the broader BISCOM literature that we deal with.
• 6:04
  SPEAKER_03: But that being said, the new guidance certainly leverages the business combinations guidance that we have.
• 6:10
  SPEAKER_03: Right.
• 6:10
  SPEAKER_03: So what I mean by that is that for the most part, the net assets, when I said new basis, they're all coming over at fair value.
• 6:16
  SPEAKER_03: But there's the same exceptions here that there are in the business combination literature for things like contingencies or leases or taxes, employee benefits, things, things like that.
• 6:27
  SPEAKER_03: So those those follow the same guidance.
• 6:29
  SPEAKER_02: Very familiar for people who've dealt with that before.
• 6:31
  SPEAKER_02: Yeah, exactly.
• 6:32
  SPEAKER_03: Uh and and the phrase formation date is also a defined phrase in here.
• 6:36
  SPEAKER_03: And it's meant to be kind of similar to the acquisition date in the business combination, but again, they're not using the phrase acquisition date in my air quotes.
• 6:43
  SPEAKER_03: Yeah.
• 6:43
  SPEAKER_03: You know I like my air quotes.
• 6:45
  SPEAKER_03: Yep.
• 6:45
  SPEAKER_03: But it's the it's the relevant date that you would use to measure all of the contributed assets and liabilities.
• 6:51
  SPEAKER_02: Aaron Powell That's great clarification and obviously very important to understand some of the similarities and, of course, the differences from BISCOM accounting.
• 6:58
  SPEAKER_02: Um we also understand that guidance is limited in scope.
• 7:01
  SPEAKER_02: So could you share with us who you think because basically the industries that you think will most be affected by this change?
• 7:07
  SPEAKER_02: I think one of the things, you know, as an auditor years and years ago, when I was uh before I went to the SEC, um spent a lot of time with you know real estate companies or whatever, but what what what types of companies would we see this kind of impact, how it would play out?
• 7:22
  SPEAKER_03: Aaron Powell Yeah, I mean we we we do see joint ventures, obviously, across a lot of different industries.
• 7:29
  SPEAKER_03: Of course, the the trick here is that it has to be at a joint venture, more air quotes.
• 7:35
  SPEAKER_03: For for accounting purposes.
• 7:37
  SPEAKER_03: We often hear business people bandy about the phrase joint venture all the time.
• 7:42
  SPEAKER_03: Trevor Burrus, Jr.
• 7:42
  SPEAKER_02: And I think that's a great point.
• 7:44
  SPEAKER_03: Right.
• 7:44
  SPEAKER_03: And and and so everything is called a joint venture.
• 7:47
  SPEAKER_03: When two parties, two or more parties are getting together to do something, everybody calls it a joint venture internally, but there's some specific definition of what a joint venture is for accounting purposes, uh, and it has to meet all of those to be in the scope of this guide.
• 8:01
  SPEAKER_03: Right.
• 8:01
  SPEAKER_03: So that's you know, there's joint control between the parties and all the key decisions that have to be made.
• 8:06
  SPEAKER_03: All the parties are active participants, it's not just a financial investor or they're actively involved in it, generally operated for the mutual benefit of the companies or sharing risks or things like that.
• 8:15
  SPEAKER_03: So, anyways, there's some there's some specific guidance to look to.
• 8:18
  SPEAKER_03: But in terms of the industries, I mean we we we see it in things like the energy industry has a share of it, the construction industry has a share of it, sometimes in the farmer world, you know, maybe entities that have somewhat complementary drug compounds maybe are going to share some resources around it, and and in the technology sector as well.
• 8:38
  SPEAKER_03: So, you know, it it's I wouldn't say it's limited to specific industries.
• 8:42
  SPEAKER_03: We do see it across different ones, but there's probably a lot fewer accounting joint ventures than what business people talk about as being a joint venture.
• 8:51
  SPEAKER_03: Right.
• 8:51
  SPEAKER_03: Right.
• 8:52
  SPEAKER_03: The other thing from a scope perspective that I, again, I'll just I I said it before, but I'll highlight again, it it this does not change any of the accounting by the joint venture partners that are contributing the assets down into this business.
• 9:05
  SPEAKER_03: They've probably lost control or they have lost control or unilateral control of what they had before and now have joint control.
• 9:13
  SPEAKER_03: So that's a fair value transaction where they've basically disposed of what they had and now have like an equity method investment to account for.
• 9:21
  SPEAKER_03: So there is fair value information already out there.
• 9:24
  SPEAKER_03: The FASB acknowledged that, hey, the companies doing these transactions generally have fair value information.
• 9:30
  SPEAKER_03: But now this standard is going to require the joint venture to do more fair value stuff at a lower level, perhaps.
• 9:38
  SPEAKER_03: And at a lower level of materiality, perhaps, than the venturers were doing.
• 9:43
  SPEAKER_03: So there's definitely some incremental work that will perhaps come out of this standard as a result, because now the joint venture will have to fair value, with some exceptions, but generally fair value all of its assets and liabilities, which is going to be at a lower level, at a lower level of materiality, probably than the fair value of the whole entity that the venture partners were using before.
• 10:14
  SPEAKER_02: One thing that kind of popped in my head as you were going through that was just, okay, the venturer, right?
• 10:19
  SPEAKER_02: Like you're contributing assets.
• 10:21
  SPEAKER_02: So they're, you know, how do you think how do they think about impacts to reporting, right?
• 10:25
  SPEAKER_02: Financial reporting, impacts, SEC reporting.
• 10:27
  SPEAKER_02: So it it's it's definitely one thing where you have to look at both sides, um, and and you can't ignore that there may be potential impacts or you know that that you know could be material and may require other things to be considered and evaluated.
• 10:40
  SPEAKER_02: Um as we look ahead, can you remind us just how and when this standard will be effective?
• 10:47
  SPEAKER_03: Right.
• 10:47
  SPEAKER_03: So uh standard did come out a year and a half ago or so, it's but it could be adopted by anyone at any time now, anyways.
• 10:55
  SPEAKER_03: But the required adoption date is it's effective prospectively for any joint ventures formed after January 1st, 2025.
• 11:04
  SPEAKER_03: So it's a little different type of transition than most standards.
• 11:08
  SPEAKER_03: It's not fiscal years beginning after a certain date.
• 11:12
  SPEAKER_03: It's just sort of a universal single date for everybody.
• 11:14
  SPEAKER_03: After January 1st, all new joint ventures.
• 11:16
  SPEAKER_03: Finally, something that's easy.
• 11:17
  SPEAKER_03: Yes.
• 11:18
  SPEAKER_03: Have to be uh have to follow this new guidance.
• 11:20
  SPEAKER_03: Now, if you have an existing joint venture that or one that's formed before that date, really any date in the past, theoretically back decades, if you wanted to, you could apply the new guidance retrospectively to it.
• 11:32
  SPEAKER_03: But of course, that would mean you'd have to have all of that information in order to do what the the calculations of what the balance ultimately to work to what the balances would be as of the uh the date of adoption, as if as if you had always been following this guidance.
• 11:45
  SPEAKER_03: So I don't know how many are going to go back retrospectively to do it.
• 11:48
  SPEAKER_03: We we don't hear too many of that.
• 11:49
  SPEAKER_03: Frankly, we don't hear we don't we don't run into too many in our client base of actual joint ventures themselves.
• 11:54
  SPEAKER_03: So uh but for those that that have it, it's certainly um relevant.
• 11:58
  SPEAKER_03: Part of what the FASB was trying to do here was create consistency, but also maybe perhaps eliminate or minimize the number of basis differences between between the parties, which is a whole nother topic for another day, perhaps about equity method basis differences.
• 12:13
  SPEAKER_03: But since, as we said, the investor is going to record this at fair value and always has had a record at fair value, if the joint venture was recording stuff that's nothing other than fair value, you had all these basis differences to track.
• 12:26
  SPEAKER_03: And and part of the goal here was to try to reduce or certainly simplifies it.
• 12:31
  SPEAKER_02: Definitely.
• 12:31
  SPEAKER_02: Definitely.
• 12:32
  SPEAKER_02: So lastly on this topic, where can our listeners find more information?
• 12:36
  SPEAKER_03: So yeah, we we included discussion about this guidance uh in Chapter 6 of our equity method and joint ventures guide.
• 12:44
  SPEAKER_03: And I think we also put out an in-depth about this new guidance back in the latter half of 2023 when it came out that's still up on our viewpoint platform.
• 12:53
  SPEAKER_03: Right.
• 12:53
  SPEAKER_02: Well, that was a great summary, and really appreciate you pointing us to those resources.
• 12:57
  SPEAKER_02: Um let's pivot now to an area that is is definitely um at the high end of interest, not just of our capital markets, but obviously of regulators, of the Trump administration, um, and that is crypto assets.
• 13:12
  SPEAKER_02: And so there is an ASU 2023-08 on crypto assets.
• 13:18
  SPEAKER_02: Um you know, I know we've heard, and and even back when I was at the SEC, a lot of conversations around the current accounting model isn't really necess, you know, is not necessarily desirable, and both preparers and investors had had voiced doesn't really do a great job of reflecting the nature of the assets.
• 13:32
  SPEAKER_02: And I think that was one of the things that that we, when I was at the staff that we talked a lot about.
• 13:37
  SPEAKER_02: Um could you give us a little background on what the accounting for crypto assets looks like today and then the changes we'll see under the new guidance?
• 13:45
  SPEAKER_03: Right.
• 13:45
  SPEAKER_03: And certainly uh as we've seen in the marketplace recently, it's certainly uh you know yet another reason why the existing model maybe was you know not what made sense to a lot of investors.
• 13:55
  SPEAKER_03: And that's because the existing model treats crypto assets as an indefinite, live, intangible asset.
• 14:02
  SPEAKER_03: Kind of doesn't fit into any other bucket of gap.
• 14:06
  SPEAKER_03: So it ended up as an intangible asset with an indefinite life.
• 14:09
  SPEAKER_03: And that, as our listeners probably know, follows a cost-less impairment model.
• 14:15
  SPEAKER_03: So you can write the assets down, but you can't write them back up.
• 14:19
  SPEAKER_03: And you have to track any time during the period that they've gone down, you might have to impair them.
• 14:24
  SPEAKER_03: So it was a one-way street, and people didn't didn't love that answer because you know these things are pretty volatile, as we're seeing.
• 14:32
  SPEAKER_03: And yeah, a lot of companies argue that that that model didn't really reflect the economics of what was going on.
• 14:38
  SPEAKER_02: And disclosures in a filing that talk about what the current price may be on a given date, right, is really not always relevant.
• 14:46
  SPEAKER_02: And oh, by the way, it's just disclosure, is you're not actually writing it back up.
• 14:51
  SPEAKER_02: And so obviously very challenging, doesn't really give people insights as to economically truly what's happening.
• 14:57
  unknown: Trevor Burrus, Jr.
• 14:57
  SPEAKER_02: Right.
• 14:58
  SPEAKER_03: So that's what the FASB is trying to do here, and what what the new guidance says is that while it doesn't change any of the initial recognition and measurement of crypto assets that you first receive, but what is changing is that crypto assets that are in the scope of this guidance will now be measured on a go forward basis at fair value with gains and losses from that remeasurement included in net income.
• 15:21
  SPEAKER_03: So now you're basically writing them up and down uh through through the through the PL, in essence.
• 15:26
  SPEAKER_03: There is a fair amount of separate presentation and disclosures in the new standard as well that kind of comes with trying to report all that.
• 15:34
  SPEAKER_03: So you do have to separately present the crypto assets that are in the scope of the standard from other intangible assets.
• 15:41
  SPEAKER_03: So you can't just lump them all together in intangible assets, and you have to separately present the remeasurement of those crypto assets uh on the income statement separately from any other amortization or impairment.
• 15:54
  SPEAKER_03: So there's def separate presentation requirements.
• 15:57
  SPEAKER_03: And then there's also a fair amount of incremental disclosures that will be required on some on an annual, some on an interim basis as well, uh.
• 16:05
  SPEAKER_03: Including listing out individual holdings and including some roll forwards so investors can really understand what you have and what's changed during the period.
• 16:13
  SPEAKER_02: Yeah, I think as you think about, and we talked, we already talked a little bit about this, it's just the economics, and you know, it's obviously will lessen the impacts when you get to the point where you're actually going to sell um those assets down the line.
• 16:26
  SPEAKER_02: And so I think kind of that that volatility, you're certainly gonna see it in in moving forward once you adopt the standard.
• 16:33
  SPEAKER_02: Um look, I I think this one is interesting because the FASB still thinks um that these are intangible assets and not just a currency or cash equivalent.
• 16:42
  SPEAKER_02: I mean, they don't want to start marking all intangible assets different values.
• 16:46
  SPEAKER_02: How do you know when you can and can't apply this new guidance as you're like going through some like, well, which which crypto assets would fall into the scope, like you know, Bitcoin?
• 16:56
  SPEAKER_02: What what what are you thinking there?
• 16:58
  SPEAKER_03: Right.
• 16:58
  SPEAKER_03: Right.
• 16:58
  SPEAKER_03: No, and that's definitely one of the biggest challenges here.
• 17:01
  SPEAKER_03: I mean, the FASB is basically creating an exception to the general model that they thought made sense in the circumstances, but but it's always hard to figure out the right scope of any exception uh that that they're making here.
• 17:13
  SPEAKER_03: And of course, further complicating that is that there's no universal or uniform definition of a crypto asset, sort of like joint venture, right?
• 17:21
  SPEAKER_03: Everybody has their own way of describing it.
• 17:23
  SPEAKER_03: So certainly the scope is pretty important.
• 17:26
  SPEAKER_03: So what at a pretty high level, you know, to be in the scope of this guidance, the FASB said they, you know, they first have to be an intangible asset.
• 17:33
  SPEAKER_03: So that means they're not not a financial asset like a fiat currency or something like that, right?
• 17:39
  SPEAKER_03: Obviously, people think of this as like just a currency, right?
• 17:42
  SPEAKER_03: So cryptocurrency.
• 17:43
  SPEAKER_03: So people think of it as like a currency like I can use it to pay for something, isn't it a currency?
• 17:47
  SPEAKER_03: Right.
• 17:47
  SPEAKER_03: It's like no differently than holding, you know, Japanese yen or euros or something like that.
• 17:52
  SPEAKER_03: But but they're not that, at least not not at the moment, right?
• 17:55
  SPEAKER_03: I guess we'll see where the world goes with.
• 17:56
  SPEAKER_03: Yeah, where countries go with it.
• 17:58
  SPEAKER_02: Yeah.
• 17:58
  SPEAKER_03: Right.
• 17:58
  SPEAKER_03: So so it can't be a financial asset, and and of course they lack physical substance.
• 18:04
  SPEAKER_03: But then beyond that, they also have to be crypto assets that are on a distributed ledger, like like a blockchain.
• 18:12
  SPEAKER_03: They have to be fungible, meaning that there's nothing unique about you know this Bitcoin versus that Bitcoin or whatever, whatever currency you're talking about.
• 18:20
  SPEAKER_03: And they also can't give the holder any specific rights or claims to goods or services.
• 18:28
  SPEAKER_03: I mean, in other words, they can't be a utility token, which we see a lot of issues, right, where the you hold a token or the the the crypto asset and that gives you the right to something from them in the future.
• 18:39
  SPEAKER_03: It can't be those, it has to be something that that isn't related to that.
• 18:43
  SPEAKER_03: And it also can't be something that's created by the company itself or one of its related parties, since we've seen a lot of videos as well, right, where a company kind of creates its own coins.
• 18:53
  SPEAKER_03: Those don't work.
• 18:54
  SPEAKER_03: Um one area that's a little tricky, uh, and it's probably beyond the scope of this podcast, is the notion of wrapped tokens.
• 19:04
  SPEAKER_03: Uh because the guidance would say you have to really understand these wrapped tokens, uh, because the the wrap tokens give their holders the rights to other assets, including other tokens.
• 19:16
  SPEAKER_03: And so since the guidance says that you're not in scope if what you hold is giving you the right to some other asset, it might suggest that these wrap tokens are not in scope.
• 19:26
  SPEAKER_03: And that that's still an area that's a little bit um challenging for folks.
• 19:29
  SPEAKER_03: So I would say if you have that, it would probably be good to look into the detailed scope discussion that we have in our crypto guide as well as well as the standard itself.
• 19:38
  SPEAKER_03: One thing I would say that that maybe is a surprise to folks is that unlike some other bits of accounting literature, uh, one thing that's not in the scoping requirements here is whether the particular crypto asset has a quoted price or trades in an active market.
• 19:55
  SPEAKER_03: There's no practical expedient for not measuring it at fair value just because you can't readily determine the price of it.
• 20:02
  SPEAKER_03: So if it's in scope, but it doesn't have a quoted price, you still have to go figure out fair value each period, like any other thing that you have to figure out a fair value for.
• 20:10
  SPEAKER_03: So that's interesting.
• 20:10
  SPEAKER_03: You don't get a scope out for it like you do for like investments in uh you know an equity of a company that that's not public, you might have certain practical expedients, you don't get that same practical expedient here.
• 20:21
  SPEAKER_03: Right.
• 20:21
  SPEAKER_02: Look, that's an interesting point.
• 20:23
  SPEAKER_02: Well, one question that popped up um as you were kind of going through all that is situations where a company does register a token.
• 20:32
  SPEAKER_02: And let's say it's you know it's something that they register with the SEC, it's traded on an exchange.
• 20:39
  SPEAKER_02: If you are investing in that token, what guidance would be applicable to those situations?
• 20:45
  SPEAKER_02: Are you just looking and saying this is just like any other investment security and you're going to account for it under the relevant guidance?
• 20:51
  SPEAKER_02: Aaron Powell So if you've created your own token?
• 20:54
  SPEAKER_02: Aaron Powell So you created your so you so in uh a company creates its own token, right?
• 20:58
  SPEAKER_02: They have their coin offering, I used to call them initial coin offerings, right?
• 21:01
  SPEAKER_02: And they register with the SEC, they start trading, and then another company comes in and invests in those tokens.
• 21:08
  SPEAKER_02: Where do where does that fall?
• 21:10
  SPEAKER_02: I mean it seems like it wouldn't be subject to this guidance, right?
• 21:13
  SPEAKER_02: It seems like it would be a security.
• 21:15
  SPEAKER_02: The SECs recognize it as a security.
• 21:18
  SPEAKER_02: Like has that been something that's been discussed?
• 21:20
  SPEAKER_03: Yeah, well, I guess I mean from the the company that created it, it certainly wouldn't be in the scope for the second.
• 21:26
  SPEAKER_03: Exactly.
• 21:26
  SPEAKER_03: Right, right.
• 21:27
  SPEAKER_03: For a company that purchases it, I guess you'd have to look back to the scope of it, and including the one that it's on a distributed ledger like a blockchain.
• 21:35
  SPEAKER_03: So I don't know if it is or it isn't.
• 21:38
  SPEAKER_03: Every one of those is different, right?
• 21:39
  SPEAKER_03: They're unique white papers or so, but there's probably a good limit of the code.
• 21:41
  SPEAKER_02: I'm not sure there's a lot of companies are investing in another company's tokens.
• 21:45
  SPEAKER_02: But you'd have to look at the I think you'd have to look at the scope.
• 21:48
  SPEAKER_03: I mean my sense is that they it might not meet the scope, but I think that every every one of those was very bespoke on white papers and the like as to what does that entail.
• 22:00
  SPEAKER_03: And maybe the token gives you the right to some goods or services from that company.
• 22:03
  SPEAKER_03: Right.
• 22:03
  SPEAKER_03: We certainly saw a lot of initial coin offerings that that met Yeah, that fell in that bucket.
• 22:08
  SPEAKER_03: Right.
• 22:08
  SPEAKER_03: That that bucket of it gives the holder of those tokens the right to get something from the company at a discount in the future.
• 22:15
  SPEAKER_03: Those would not be in scope, because that that's one of the criteria.
• 22:18
  SPEAKER_03: And if it's not on a blockchain, it would not be in scope.
• 22:21
  SPEAKER_03: And so if it's not, then I guess they would still be in their existing model of it's an indefinite lived intangible asset.
• 22:28
  SPEAKER_03: Or maybe it's a service or a prepaid service, right?
• 22:30
  SPEAKER_03: If it's some type of um utility token, then then it um it it might be the right to a future service or something like that.
• 22:37
  SPEAKER_03: So you gotta go through all the things you go through when you when you make those adjustments.
• 22:41
  SPEAKER_02: So you previously raised an important consideration about the amount of incremental disclosure that will be required and kind of had me thinking about what that might look like.
• 22:50
  SPEAKER_02: And you start to think about the thousands of crypto-related transactions that that may occur in a period.
• 22:56
  SPEAKER_02: It's a good reminder to preparers that they really are needing to rely on and be ready from a data perspective to gather the information required to measure and disclose their their crypto holdings.
• 23:05
  SPEAKER_02: And so really highlights to me kind of the importance of controls and effective control environment.
• 23:10
  SPEAKER_02: So, Jay, with all of that in mind, can you share when this standard will be effective?
• 23:15
  SPEAKER_03: Soon.
• 23:16
  SPEAKER_03: It's effective uh for all companies, both public and nonpublic, in fiscal years beginning after December 15th, 2024, and including the interim periods in those years.
• 23:28
  SPEAKER_03: So that would mean if you're a calendar year public company or any well, public company because you'll be doing interims, but a calendar year company, it means you're you're adopting it in Q1 of 25, like right now, as we're sitting here right now.
• 23:40
  SPEAKER_03: So basically, uh if you don't have that data, the ability to gather that data, you better you better figure it out soon, I guess.
• 23:47
  SPEAKER_03: And this is one that um is adopted via a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
• 23:56
  SPEAKER_03: So it's a modified retrospective application.
• 23:58
  SPEAKER_03: You don't have to go back to the prior years.
• 23:59
  SPEAKER_03: You can't go back to the prior years.
• 24:00
  SPEAKER_03: But it makes sense.
• 24:01
  SPEAKER_03: But you know, it's a cut over as of the date of adoption.
• 24:04
  SPEAKER_02: Yeah.
• 24:05
  SPEAKER_03: So where can listeners find more information on this topic?
• 24:08
  SPEAKER_03: Trevor Burrus, Jr.
• 24:08
  SPEAKER_03: Well, this one we have a whole guide dedicated to crypto assets.
• 24:13
  SPEAKER_03: And this new guidance is interspersed throughout it, although a lot of the accounting discussions in Chapter 2 and the disclosure requirements are in chapter five.
• 24:23
  SPEAKER_03: And like the last one, we also still have an in-depth outstanding on our interview.
• 24:29
  SPEAKER_02: Which is a very good in-depth that I uh highly recommend.
• 24:31
  SPEAKER_02: Trevor Burrus, Jr.
• 24:32
  SPEAKER_02: Excellent.
• 24:32
  SPEAKER_02: Did you write that?
• 24:33
  SPEAKER_02: I did not.
• 24:34
  SPEAKER_02: I can't.
• 24:34
  SPEAKER_02: Can't take credit for that.
• 24:36
  SPEAKER_02: It's a great indept.
• 24:37
  SPEAKER_02: So that's good.
• 24:37
  SPEAKER_02: Yeah.
• 24:38
  SPEAKER_02: Yeah, absolutely.
• 24:39
  SPEAKER_02: So let's move on to another kind of complex instrument that's covered in ASU 2024-01, and that's you know, the scope application of profits interests, and similar words in stock compensation literature.
• 24:52
  SPEAKER_02: Our listeners may be thinking, what in the world is a profits interest?
• 24:56
  SPEAKER_02: So can you talk a little bit about what that what that is?
• 24:58
  SPEAKER_03: Aaron Powell Well, whatever it is, it sounds like I'd like one.
• 25:01
  SPEAKER_02: Absolutely.
• 25:02
  SPEAKER_03: I'll get to that, I promise.
• 25:04
  SPEAKER_03: But maybe before we're getting to that, maybe just give a little backdrop in that about the compensation literature because what we have guidance in the stock-based compensation literature for those kinds of awards.
• 25:17
  SPEAKER_03: And then we have separate guidance for just cash payments that might be viewed as more like deferred compensation or bonuses.
• 25:24
  SPEAKER_03: So so there's um so ultimately this is about a scope question, I guess is the name implies.
• 25:29
  SPEAKER_03: Um and the and the what's challenging is that the stock compensation guidance, it's in ASC 718, you know, is written in the context of a more traditional C corporation where with stock, regular old common stock, and the holders getting either restricted stock awards or stock options, right?
• 25:46
  SPEAKER_03: That's the general premise in all the examples in there.
• 25:49
  SPEAKER_03: So it's written in the c that kind of context.
• 25:52
  SPEAKER_03: But of course, as we all know, more and more companies are being established as other kinds of legal entities like limited liability corporations or LLCs or limited partnerships.
• 26:01
  SPEAKER_03: And those entities have a lot of more flexibility in what their capital accounts might look like, and they may issue many different kinds of arrangements to their employees and service providers to let them share in the upside of the entity.
• 26:16
  SPEAKER_03: And one of those items, tying into the your question of what this is, one of those items is called a profits interest, uh often in an LLC type of agreement.
• 26:25
  SPEAKER_03: And what it does is it gives the holder the right to share in the future profits and appreciation of the assets of the entity, but not any right to the net assets at the time it's granted.
• 26:38
  SPEAKER_03: So usually the way that itself out is that the instrument, the profits instrument, doesn't start to participate in any distributions of the entity or liquidation proceeds of the entity until the other investors have first received back a stated amount, which is usually the value at the time of the time of the grant.
• 26:56
  SPEAKER_02: Well that makes sense.
• 26:57
  SPEAKER_02: I mean, obviously sounds like a complex structure that's kind of like a stock appreciation, right?
• 27:02
  SPEAKER_03: Aaron Powell Yeah, it is.
• 27:03
  SPEAKER_03: It does economically behave a lot like that.
• 27:06
  SPEAKER_03: And I think ultimately it's valued like that if we do have to value it.
• 27:09
  SPEAKER_03: Uh but it's not something that's defined in GAAP.
• 27:12
  SPEAKER_03: That's the challenge.
• 27:13
  SPEAKER_03: Uh but it is defined in the tax code, and that's kind of where this this this comes out of.
• 27:17
  SPEAKER_03: And the reason why people like it, because if it's structured the right way, there's no ordinary compensation income for tax purposes at the time it's granted.
• 27:26
  SPEAKER_03: Right.
• 27:26
  SPEAKER_03: Yeah.
• 27:27
  SPEAKER_03: And any future distributions are all taxed as capital gains.
• 27:30
  SPEAKER_03: So people like that approach.
• 27:32
  SPEAKER_03: Uh but they clearly have some value, right?
• 27:34
  SPEAKER_03: You can't just say that just because they're kind of quote, at the money, you know, there's no if the company liquidated tomorrow, they wouldn't get anything.
• 27:41
  SPEAKER_03: The tax rules may say there's no taxable compensation at that moment, but that doesn't mean there's not fair value for it.
• 27:48
  SPEAKER_03: But because these are non-traditional arrangements and they can be structured in a variety of different ways, they they certainly don't look like your typical stock or stock option awards that that's covered in the the literature for stock comp awards.
• 28:00
  SPEAKER_03: So there's always been a lot of complexity in determining whether these profits interest awards should be accounted for as stock comp under ASC 718, or more like just a cash bonus or profit sharing arrangement under that guidance, which is ASC 710.
• 28:17
  SPEAKER_03: And so there is some resulting diversity in practice here, uh, although the large firms all have some interpretive guidance in our guides that help you all agree.
• 28:28
  SPEAKER_03: I think, I mean, well, it's all very judgmental.
• 28:30
  SPEAKER_03: Right.
• 28:30
  SPEAKER_03: But they all kind of have similar factors to think about.
• 28:34
  SPEAKER_03: But you know, the decisions are still hard when you kind of think about all the factors.
• 28:38
  SPEAKER_03: But so we all I think agree on the approach.
• 28:40
  SPEAKER_03: It's just that the judgments are still tricky with all the different facts and circumstances.
• 28:45
  SPEAKER_03: But while I think all the large firms have that, you know, not every organization is f as familiar with them with those that framework that's out there.
• 28:55
  SPEAKER_03: Not everyone is looking looking at those.
• 28:57
  SPEAKER_03: So this was something that was initially identified and discussed by the FASBE's private company council as sort of a you know, maybe a way to help provide some input and feedback for them.
• 29:06
  SPEAKER_03: Because typically these are issued by private companies.
• 29:08
  SPEAKER_03: But ultimately, when the FASBI decided to take on a the project and issue some guidance, they ultimately made it applicable to all companies because many of the entities that issue these arrangements ultimately seek to go public, so it's not limited to companies that are remaining private forever.
• 29:23
  SPEAKER_02: So in a nutshell, would you say that profits interest awards since tied to an entity's future profits are more common in private companies while the stock appreciation rights, since tied to the stock price are mostly used by public companies.
• 29:40
  SPEAKER_03: I mean, is that the trend or it is and and it and it's not just whether it's private or public, I mean obviously it's a little bit easier in a public company to come up with a stock price, but you can always go value the stock.
• 29:51
  SPEAKER_03: But it's it's more that these profits interests show up in LLCs.
• 29:55
  SPEAKER_03: Right.
• 29:55
  SPEAKER_03: Whereas a stock appreciation rate tends to show up more in a C Corpore.
• 29:59
  SPEAKER_03: In a C Corp.
• 29:59
  SPEAKER_02: Yeah.
• 29:59
  SPEAKER_03: That makes sense.
• 30:00
  SPEAKER_03: I mean it's not limited.
• 30:01
  SPEAKER_03: I don't want that's an overgeneralization, but these profits-interests tend to be in these other kinds of alternative structures.
• 30:08
  SPEAKER_02: Yeah.
• 30:08
  SPEAKER_02: So what did the FASBE decide?
• 30:10
  SPEAKER_03: Aaron Powell So what they ended up doing, it's kind of an interesting standard in that the FASBE really didn't change any guidance here.
• 30:16
  SPEAKER_03: What they were really just trying to do to do was to add a bit of a roadmap by making it clear to everybody that you have to run these profits-interests through the overall model, the scoping model, to determine if they're in the scope of the stock comp literature or not.
• 30:31
  SPEAKER_03: And what they did is they provided four examples of various fact patterns that kind of walk through the analysis and come to a conclusion and say these are, you know, a couple of them they say they are in the scope of the stock comp literature, and a couple of them they say they aren't in the scope of the stock comp literature.
• 30:46
  SPEAKER_03: But of course, you know, the these are more endpoint kind of examples, or they're a bit more obviously one or the other.
• 30:53
  SPEAKER_03: Uh but would like it with everything, we all run into, and our listeners all run into the hard judgments or the ones in the middle.
• 30:59
  SPEAKER_03: So there's still a lot of judgment to apply here.
• 31:01
  SPEAKER_03: Now, it's true that you know this this will help you figure out if you're in the scope of 718 or not, the stock comp literature, but if it is in the scope scope of that literature, you still have to run it through the rest of the model to figure out if it's equity or liability classified.
• 31:15
  SPEAKER_03: Whether you're in just because you're in 718, doesn't mean it still may not be a liability award if you if you meet the criteria for that.
• 31:21
  SPEAKER_03: It's just are you in that model in the first place, or are you more just in a like a bonus comp type model?
• 31:26
  SPEAKER_03: Trevor Burrus, Jr.
• 31:27
  SPEAKER_02: Yeah, I think that's that's very important points there and important for our listeners to understand that the accounting model isn't necessarily changing here.
• 31:34
  SPEAKER_02: Um so once you determine which guidance you're in the scope of, it's still necessary to kind of go through that the corresponding accounting model um in an appropriate manner.
• 31:43
  SPEAKER_02: So whether that's ASC 718 or ASC 710.
• 31:46
  SPEAKER_02: Um can you give us an overview of the effective date of this one and and what resources are available to our listeners?
• 31:52
  SPEAKER_03: Yeah.
• 31:52
  SPEAKER_03: Yeah.
• 31:53
  SPEAKER_03: So for this one, for public business entities, it's effective for calendar 2025.
• 32:00
  SPEAKER_03: So it's annual periods beginning after December 15th, 2024, so calendar 25 for those companies.
• 32:07
  SPEAKER_03: And then for all other entities, for private companies, let's say it's it's a year later, so annual periods beginning after December 15th, 2025, so calendar 26.
• 32:18
  SPEAKER_03: Uh you can adopt it early, and you can either adopt it prospectively just to newer awards that are granted or modified after the effective date, the day you adopt it, or retrospectively to all awards that have previously been granted, and you'd have to go back in that case and recast all the periods presented.
• 32:37
  SPEAKER_03: Now that being said, you know, we don't really think there'll be that much of an impact, at least for our clients, because this the standard's largely consistent with the interpretive guidance we had before.
• 32:47
  SPEAKER_03: But since it's the first time there's been something about these kinds of awards in the authoritative guidance, you know, if you have them, it's certainly worth taking a look at.
• 32:55
  SPEAKER_03: Yeah, definitely.
• 32:55
  SPEAKER_03: And in terms of where we have some guidance around it, we we included um some discussion of this new guidance in chapter six of our stock-based compensation guide.
• 33:05
  SPEAKER_03: And there's a whole section in there about awards issued by pastoral entities, kind of all those factors we were talking about before.
• 33:11
  SPEAKER_02: Yeah, one one one thing that resonated with me, Jay, as you were kind of going through the discussion on this one is just the importance of like just not simply looking at what something's titled or called.
• 33:22
  SPEAKER_02: You really got to look at the structure of these awards and understand the nuances and um, you know, really really important to not just you know gloss over it and assume, oh, this doesn't apply to us because we don't issue these because you call them something different.
• 33:35
  SPEAKER_02: So I think it's definitely um a good topic.
• 33:38
  SPEAKER_02: We'll finish the podcast with one last standard, and I think this one's um a unique one, right?
• 33:44
  SPEAKER_02: Because it's been an effect for public business entities in calendar 2024, still on the horizon for 2025 for non-public entities.
• 33:51
  SPEAKER_02: So um it's it's also got the most complicated sounding name.
• 33:55
  SPEAKER_02: And I think, you know, when I read it, I'm like, well, you know, uh, this has been discussed as PAM.
• 34:00
  SPEAKER_02: Um and so it's uh that's ASU 2023-01, um, which is accounting for investments in tax credit structures using the proportional amortization method.
• 34:10
  SPEAKER_02: So that's the PAM, but the PAM comes in.
• 34:12
  SPEAKER_02: I know it's a mouthful.
• 34:13
  SPEAKER_02: Jay, can you give us some clarity on this one?
• 34:15
  SPEAKER_03: Sure.
• 34:16
  SPEAKER_03: Well, I'll try here, anyways.
• 34:17
  SPEAKER_03: Um yeah, it's definitely this one needs a little background to get into before getting into the accounting, because it's about the unique accounting for a particular type of investment structure out there.
• 34:29
  SPEAKER_03: So so this is all about taxes, tax credits.
• 34:32
  SPEAKER_03: So the tax code allows for a variety of tax credits to incentivize certain types of investments and development.
• 34:40
  SPEAKER_03: So think of things like low-income housing projects or rehabilitating historic structures or renewable energy projects like solar and wind or things like that.
• 34:52
  SPEAKER_03: So there's a lot of different kinds of credits out there.
• 34:54
  SPEAKER_03: Obviously, the the IRA act that's been out for you know a little bit of time created even more of them.
• 34:59
  SPEAKER_03: So there's you know, a lot of this stuff out there.
• 35:02
  SPEAKER_03: And developers and operators of these projects, who would be the ones to get the credits through the projects, they may not generate enough taxable income to benefit from these credits.
• 35:14
  SPEAKER_03: So as a result, over the years, various investment structures have been developed that involved operating the project using uh basically a specially created legal entity that's a pass-through entity for tax purposes, and then investors can come in and invest in the equity of that pass-through entity and get the tax credits as part of their return.
• 35:33
  SPEAKER_02: Aaron Powell Got it.
• 35:34
  SPEAKER_02: So and the investors provide the capital for these developments because they're the ones that can actually use the tax credits.
• 35:39
  SPEAKER_02: How can I get my hands on that to how can I use those tax credits myself?
• 35:45
  SPEAKER_02: Right.
• 35:45
  SPEAKER_02: Trevor Burrus, Jr.
• 35:45
  SPEAKER_02: It's obviously going to be cheaper financing for the developers than just obviously going to the bank and getting loans or some sort of line of credit.
• 35:54
  SPEAKER_02: Any other thoughts there?
• 35:55
  SPEAKER_02: Trevor Burrus, Jr.
• 35:56
  SPEAKER_03: Yeah.
• 35:56
  SPEAKER_03: No, I mean that's exact that's exactly right.
• 35:58
  SPEAKER_03: That investors basically are putting up capital for these developments, and instead of getting cash back as return of that money, they're getting the tax credits.
• 36:08
  SPEAKER_03: And you know, they they they run their economics and decide that that's uh you know a good investment.
• 36:13
  SPEAKER_03: And um, especially for financial institutions, there's often community reinvestment requirements, right?
• 36:19
  SPEAKER_03: They they they get some good positive benefit from the regulators for investing in these kinds of projects because they're often in you know economically challenged areas or you know, they're just good for the public interest.
• 36:31
  SPEAKER_03: Good.
• 36:32
  SPEAKER_03: Public interest, right?
• 36:34
  SPEAKER_03: Yeah, there's a lot of motivations to invest in it, both financial and non-financial.
• 36:39
  SPEAKER_03: Um but when you invest in these types of things, and because they're investments in in uh partnerships and things like that, you know, they typically would qualify under general gap for the equity method of account under under ASC 323, for the equity method, because they're passed through entities with capital accounts and they have more than a minor interest in them.
• 36:59
  SPEAKER_03: And the the the general perspective is those would be equity method investments.
• 37:03
  SPEAKER_03: But for the most part, what you get here as an investor isn't a typical cash return, right?
• 37:09
  SPEAKER_03: It's it's all these tax credits and tax losses, like from depreciation on the assets that you can use on your tax return to reduce your taxes.
• 37:18
  SPEAKER_03: But that creates an interesting disconnect in the income statement because all those tax benefits go through your tax line.
• 37:24
  SPEAKER_03: So your tax expense line is benefited by all those credits and deductions.
• 37:30
  SPEAKER_03: But then when you recognize the cost of the investment over time, that's going through pre-tax income.
• 37:34
  SPEAKER_03: So you have this mismatch between pre-tax and tax.
• 37:38
  SPEAKER_03: And so some special accounting called PAM or proportional amortization method was developed years ago, decades ago, to help address that.
• 37:46
  SPEAKER_03: But from a scope perspective, because that's what they were dealing with at the time, that guidance can only or could only be applied to investments in low-income housing tax credit projects, nothing else.
• 37:58
  SPEAKER_03: Right.
• 37:59
  SPEAKER_03: Didn't go beyond that.
• 38:00
  SPEAKER_03: And what the PAM method lets you do is it lets you amortize the cost of the investment that you made against the tax line as you recognize the tax benefits kind of proportionately.
• 38:10
  SPEAKER_03: As you're recognizing those tax benefits, you proportionally recognize the cost of your investment in the same place so that the total impact of it all ends up in the tax line in the income statement.
• 38:21
  SPEAKER_03: So it's a little bit easier to kind of see it match up a little better.
• 38:24
  SPEAKER_03: But as I had said, that can only scope-wise be applied to low-income housing tax credits, even though there's a bunch of other credit structures out there, uh like the solar and the wind and the other ones.
• 38:36
  SPEAKER_03: And even though, you know, the thought was, well, maybe those have some similar perspectives because of the scoping of it, those couldn't apply this.
• 38:44
  SPEAKER_03: So those had to follow that sort of split presentation model where you'd end up with tax benefits down below the line and costs up above the line, and that would distort your effective tax rate and you know make it hard for investors to really understand and understand things.
• 38:58
  SPEAKER_03: So now finally coming to the new guidance.
• 39:00
  SPEAKER_03: So that the new uh ASU or newer ASU, I guess, at this point, expanded the scope of PAM.
• 39:06
  SPEAKER_03: So it took the shackles off.
• 39:09
  SPEAKER_03: It isn't limited to low-income housing tax projects.
• 39:11
  SPEAKER_03: It's it's it allows it for the use of any investments in tax credit structures, as long as the investments are made primarily for the purpose of receiving income tax benefits because you know this is special accounting.
• 39:24
  SPEAKER_03: Right.
• 39:24
  SPEAKER_03: So you don't you shouldn't only get this in special circumstances, and it has to meet that goal as well as a number of other defined criteria that's in the guidance.
• 39:33
  SPEAKER_02: Trevor Burrus, Jr.: So it definitely sounds like it was a welcome change for investors, um, you know, certainly a beneficial outcome of the new guidance and allows more investors to get that preferred net presentation of the tax expense line in the main income statement.
• 39:47
  SPEAKER_02: I think it certainly simplifies the reporting there.
• 39:50
  SPEAKER_02: Um I imagine, though, that it will be important to assess the various investments you have when trying to figure out whether you can apply PAM, though, right?
• 39:58
  SPEAKER_03: Aaron Ross Powell Right.
• 39:59
  SPEAKER_03: No, that's definitely true because while you're absolutely right that it expands it and maybe makes it beneficial for people to use, that it's not that easy to end up qualifying, I would say still, with the criteria that are out there.
• 40:13
  SPEAKER_03: So what the guidance says is that you you get to make a policy election to try to apply PAM on uh what's called uh what the guidance calls a tax credit program by tax credit program basis.
• 40:26
  SPEAKER_03: So you you don't have to apply PAM or try to apply PAM to everything.
• 40:29
  SPEAKER_03: You could say, well, for solar projects I want to I'm gonna try, but for wind projects, I'm not.
• 40:36
  SPEAKER_03: Right?
• 40:36
  SPEAKER_03: Maybe it's just you you realize that it will be tough for it.
• 40:39
  SPEAKER_03: Because you still have to go through, even if you say I'm I'm electing to try to apply PAM, you still have to go through each individual investment to figure out if it meets all of these defined criteria that they're in the guidance.
• 40:51
  SPEAKER_03: And those were tweaked a little bit, but but but um you know similar to what they were before.
• 40:55
  SPEAKER_03: And some of those are quantitative tests.
• 40:57
  SPEAKER_03: So like one requirement is that you have to generate tax benefits that are at least equal to your investment.
• 41:03
  SPEAKER_03: So you're recovering at least 100 percent of your investment through tax benefits.
• 41:08
  SPEAKER_03: And then even beyond that, there's one of the other requirements is that substantially all, more air quotes, of the uh of the benefits that you expect to get back, you know, all the money, the value you expect to get back, that substantially all of them have to come through income tax credits and other income tax benefits like depreciation, as opposed to cash flows from operations of the project or the sale of the investment at uh you know the time that you get out of it, or things like that.
• 41:36
  SPEAKER_03: Uh you get to do that on a discounted present value basis, because a lot of times the credits are front loaded and the cash is backloaded, but you still have to meet this sort of substantially all tests.
• 41:46
  SPEAKER_03: And you know, generally in the accounting world, that's that's meant that's thought to be 90% or more.
• 41:51
  SPEAKER_03: So you know it can be hard to do that in in a number of the structures that are out there, just the economics of the structures.
• 41:57
  SPEAKER_03: And then along with the quantitative tests, there's also some qualitative ones, including one that that has become a little bit sticky at times in our experience.
• 42:05
  SPEAKER_02: Like anything with qualitative.
• 42:06
  SPEAKER_02: Anything with qualitative.
• 42:08
  SPEAKER_03: But one of them says that you, as the investor in these projects, if you want to apply PAM, you can't, cannot have the ability to exercise significant influence over the operations of the project, like a traditional equity method investment.
• 42:21
  SPEAKER_03: The thought is that if you're applying PAM, you're just supposed to be a passive investor for tax credits, not an active owner-operator looking to maximize return, right?
• 42:30
  SPEAKER_03: Again, this is an exception model.
• 42:32
  SPEAKER_03: And so most equity method investments where you're perhaps trying to maximize your return, which is what you know, all investments you're trying to do, uh, you can't get the special accounting.
• 42:42
  SPEAKER_03: You've got to just be a passive investor for tax credits.
• 42:44
  SPEAKER_03: And what we found is it can be a little challenging because as we went through the implementation of this with our clients, a lot of the structures that are out there in these other tax credit areas, at least the existing ones, gave the investors a bunch of consent rights.
• 42:59
  SPEAKER_03: And so you have to evaluate those pretty carefully to figure out do they give you influence over the operating decisions that are being made, or are they just some, I'll call it protective rights on significant events for the end of the life of the project.
• 43:13
  SPEAKER_03: But we found that there were a lot of consent rights out there in the world.
• 43:17
  SPEAKER_03: And so that this one tur can turn out to be a little tricky as well.
• 43:21
  SPEAKER_03: So because it can be hard to meet all the criteria, especially for some of the structures that are used in practice today, that's why the guidance gave you the sort of this um you know election to make, that you could you could just decide that, you know what, I'm not even gonna bother going through the process of trying to establish controls and figure out does this particular investment meet it or does it not meet it, and just say, I'm not gonna even try to apply PAM to these investments, you know, this category, but I will try to apply them to this other category.
• 43:52
  SPEAKER_03: That's why that's why the guidance kind of gives you this choice.
• 43:55
  SPEAKER_03: On the disclosure side, uh which which maybe is a helpful element of this as well.
• 44:00
  SPEAKER_03: There are a bunch of enhanced disclosure requirements to try to better explain how much the tax benefits are each period and where everything is being presented in the income statement, the balance sheet, the statement of cash flows, to help investors be able to better understand how these things are really running through your accounts and affecting things like your effective tax rate.
• 44:20
  SPEAKER_03: And what's interesting is those are required, even if you don't end up meeting the criteria to qualify for PAM, but they're part of a tax credit program that you had been attempting to try to apply PAM to, you still have to make those same disclosures whether you're in PAM or not.
• 44:35
  SPEAKER_03: Just if you've chosen, if you've elected in for a particular tax credit category, you have to make the disclosures for all of them here.
• 44:42
  SPEAKER_02: Yeah, I mean I that's very interesting to me, right?
• 44:44
  SPEAKER_02: Like it's just thinking about scope, right?
• 44:47
  SPEAKER_02: And and you've obviously made a number of points on scope.
• 44:49
  SPEAKER_02: Um definitely going to be important to understand the nature of these tax credit programs and how they meet or don't meet uh the PAM criteria because of what you laid out there with respect to the disclosure requirements, that they apply more broadly than just the investments that qualify for PAM.
• 45:04
  SPEAKER_02: Um Jay, anything else you want to add on that before before I ask you about just what's the timing on this one?
• 45:12
  SPEAKER_02: Um when is the standard effective?
• 45:14
  SPEAKER_02: Where can our listeners get more information?
• 45:16
  SPEAKER_03: Yeah, uh maybe I just I I would add that perhaps because of the the IRA and the broadening of the applicability of the credits and more of them being out there and just sort of a you know a growing interest in we'll call it good.
• 45:30
  SPEAKER_03: Doing good deeds.
• 45:32
  SPEAKER_03: Doing good deeds, right?
• 45:33
  SPEAKER_03: Uh you know, in the world that that we've while historically the investors in these types of projects tended to be financial institutions and insurance companies and the like, but we have started to see more corporate entities, I'll use that phrase, uh expressing interest in investing in these for the re reasons you said.
• 45:54
  SPEAKER_03: Um and so that's you know, therefore introducing, you know, the the notion to a lot of entities that just aren't familiar as familiar with this.
• 46:01
  SPEAKER_03: And a lot of times too, the the banks are offering to be middlemen and structure this these types of investments for corporates.
• 46:09
  SPEAKER_03: And so that you know, the some structures are evolving a little bit, and there's just more more players now that that aren't as familiar with these types of structures or the guidance.
• 46:18
  SPEAKER_03: So it's it's good guidance to take a look through if you're if you're interested uh in pursuing these.
• 46:24
  SPEAKER_03: And then moving on to your your your question there as to when is it effective and and how is it effective, it's a little more complicated here as well, like with everything.
• 46:34
  SPEAKER_03: Um Why can't they just be simple like they do like with your investment?
• 46:38
  SPEAKER_03: Exactly.
• 46:39
  SPEAKER_03: Everyone just adopts it together.
• 46:40
  SPEAKER_03: So as you said, uh this one's actually already been in effect for public companies for 2024, but for all other entities, it's it's now going to be effective this this year in 2025.
• 46:53
  SPEAKER_03: So so annual periods beginning after December 15, 2024.
• 46:56
  SPEAKER_03: So basically calendar 25 companies will have to apply it now.
• 47:00
  SPEAKER_03: Here the transition is a little complex.
• 47:03
  SPEAKER_03: Um most of the provisions you you get to choose.
• 47:07
  SPEAKER_03: You either get to apply it on a full retrospective basis, or what the FASB calls a modified retrospective basis.
• 47:14
  SPEAKER_03: Now, full retrospective means you go back and you know, for all the years in your financial statements, you view it as if you've always been applying this guidance.
• 47:22
  SPEAKER_03: Um, so you show all your years on a consistent basis, but that means you have to go back to the first year what you presented, figure out all the investments that would and wouldn't qualify, recalculate what all the amounts would be.
• 47:35
  SPEAKER_03: That's not a lot of work.
• 47:36
  SPEAKER_03: Figure out the cumulative effect, all that good stuff, and do that and run that through all the years.
• 47:40
  SPEAKER_03: Yeah.
• 47:40
  SPEAKER_03: Modified retrospective means doing all that, but just doing it in the year of adoption.
• 47:44
  SPEAKER_03: So the the back years don't change, but the the current year you're adopting it, you go through all that process to figure out what's what qualifies, what doesn't qualify.
• 47:53
  SPEAKER_03: But if that's not complicated enough, there are a couple of other, we'll call it specific transition provisions for investments in low-income housing projects that aren't accounted for under PAM that you can apply prospectively if you want.
• 48:06
  SPEAKER_03: But there's a lot of nitty-gritty detail that I don't think we need to get into here.
• 48:09
  SPEAKER_03: But if you have that, you can definitely read more about that in our in our guidance.
• 48:14
  SPEAKER_03: And that guidance is um actually we just recently repackaged uh some of our guidance in our income taxes guide to better talk about all aspects of tax credits, both this investments and these credit structures, as well as just other uh tax credits that you might you might obtain in your life cycle.
• 48:33
  SPEAKER_03: And so that's now all in chapter 18 to brand new chapter 18 of our income taxes guide that that covers all of it.
• 48:41
  SPEAKER_03: And like some of the other ones, we still have an in-depth out there about this new standard that was originally put out in 2023, although we updated it in 2024 for some new developments as well.
• 48:50
  SPEAKER_02: Trevor Burrus, Jr.
• 48:50
  SPEAKER_02: Now it'll be interesting, right, to see kind of what happens anyway in 2025 with respect to taxes, right?
• 48:56
  SPEAKER_02: Because that would obviously be a heavy focus of this Trump administration and Capitol Hill.
• 49:02
  SPEAKER_02: Well, Jay, that that was great.
• 49:04
  SPEAKER_02: We did it on in under an hour, uh, which I think is very impressive, um, with a lot of topics um that we covered.
• 49:10
  SPEAKER_02: Um really appreciate you taking the time and and all the insights you shared.
• 49:14
  SPEAKER_02: And you definitely showed why you are my go-to guy, everyone's go-to guy for so many different topical areas.
• 49:20
  SPEAKER_02: Appreciate your time.
• 49:21
  SPEAKER_03: Sure.
• 49:22
  SPEAKER_03: Thanks for having me here.
• 49:22
  SPEAKER_02: Thank you.
• 49:24
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• 49:46
  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
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