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New income tax disclosure requirements – getting ready · PwC's accounting podcast

• 0:00
  SPEAKER_02: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_01: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_01: I'm Heather Horn.
• 0:12
  SPEAKER_01: In today's episode, we discuss the FASPES Accounting Standard Update on Income Tax Disclosures, which was released in December.
• 0:20
  SPEAKER_01: These updates have been a long time coming, with the existing requirements largely unchanged for more than 15 years.
• 0:28
  SPEAKER_00: That same rate rec will be required, but under the final ASU, you will have categories, specific categories that are required to be disclosed.
• 0:37
  SPEAKER_00: And then within those categories, there will be some of those categories, I should say, there will be further disaggregation.
• 0:44
  SPEAKER_00: So, you know, the aim being more consistency across registrants as far as what they're disclosing and how they're disclosing that.
• 0:58
  SPEAKER_01: That was Jennifer Spang, Income Tax Accounting Leader in PWC's national office.
• 1:03
  SPEAKER_01: I left our conversation feeling confident I understood everything I needed to know about the broad requirements of the new standard, and I hope you do too.
• 1:12
  SPEAKER_01: Here's our conversation.
• 1:14
  SPEAKER_01: Jim, welcome back to the podcast.
• 1:16
  SPEAKER_01: So nice to have you back on.
• 1:17
  SPEAKER_01: It's been a bit since we talked about taxes, and this is a great topic today, talking about the final standard on income tax disclosure that was released by the FASBE in December, when many companies were very focused on year end and probably thought that is a problem for the spring.
• 1:33
  SPEAKER_01: Now it's the spring.
• 1:35
  SPEAKER_01: So can you just give us sort of the high level of what the standard's about and then we'll dig into some of the detail?
• 1:40
  SPEAKER_00: Yeah, absolutely.
• 1:41
  SPEAKER_00: I mean, this is a, as we've talked about before, this is a long-running program or uh project, I should say.
• 1:48
  SPEAKER_00: So it has now come to completion.
• 1:51
  SPEAKER_00: This is really focused on responses to that the FASB was receiving inquiries that it was receiving around investor feedback that disclosures were just in the income tax accounting area not clear enough to really get a sense of a company's like global risk.
• 2:08
  SPEAKER_00: And so this is really in response to that.
• 2:10
  SPEAKER_00: But the project did take a very big turn, um, as you know.
• 2:14
  SPEAKER_00: And so it got very focused really around just disaggregation.
• 2:19
  SPEAKER_00: There's a couple of things we can talk about that were added in, but the project is really about disaggregation.
• 2:24
  SPEAKER_00: And the FASBI clearly believes that the project and how they finally resolved the ASU really does address that disaggregation need.
• 2:31
  SPEAKER_01: And I know we're gonna get into the details of the disaggregation, but is there any sort of backstory of why you think it kind of turned in that direction?
• 2:41
  SPEAKER_00: Aaron Powell Well I think from the FASBI's perspective.
• 2:43
  SPEAKER_00: So the project started back in what?
• 2:46
  SPEAKER_00: I mean, 2013, 14, somewhere around there.
• 2:49
  SPEAKER_00: Yeah.
• 2:50
  SPEAKER_00: And it really, the the original project for income tax disclosure, as you may recall, really just came from a testing of a concept statement that was also, right?
• 3:00
  SPEAKER_00: So income tax is a concept statement eight, I think, maybe.
• 3:04
  SPEAKER_00: It and so it was really just about testing.
• 3:07
  SPEAKER_00: The income tax accounting was supposed to be a test of that.
• 3:09
  SPEAKER_00: That standard has long since been finalized.
• 3:12
  SPEAKER_00: And so the income tax project got delayed for a number of reasons.
• 3:16
  SPEAKER_00: There was the election, and then we had the tax cuts and jobs acts.
• 3:20
  SPEAKER_00: That was a huge shift, which impacted some of the disclosures that were proposed in the original two EDs.
• 3:27
  SPEAKER_00: Um and then ultimately when they picked it back up, there was just a view of let us talk about what it is we really want to, I'd say, achieve.
• 3:36
  SPEAKER_00: And that's when it really became very narrowly focused in really two areas and all about desegregation.
• 3:43
  SPEAKER_01: So were you surprised to finally see this project finished, or because once you saw that they had this focus, maybe before they refocused the project, you would have been surprised to see it finished.
• 3:53
  SPEAKER_00: Yeah, I mean, clearly this was top, it's been on top on the agenda for quite some time.
• 3:59
  SPEAKER_00: I think once it started to hit some delays, it was sort of a question of what would it, what would happen and and what would it likely look like if something did happen.
• 4:06
  SPEAKER_00: But I think once the scope changed, the FASB was very clear and they turned it around in a very tight time frame through an exposure draft and then finalizing to ASU.
• 4:17
  SPEAKER_00: So I think once they changed the scope of it and and really communicated their focus on these and this area of desegregation, it was pretty clear it was going to get finished.
• 4:27
  SPEAKER_01: All right.
• 4:28
  SPEAKER_01: And then one more level setting question, and this is a topic of an entirely separate podcast.
• 4:33
  SPEAKER_01: I have to ask here how this fits in with the pillar two requirements, or if it really does or doesn't fit in.
• 4:40
  SPEAKER_00: Well, I would say this is completely separate and distinct from it, um, from pillar two as a thing, if you will.
• 4:46
  SPEAKER_00: Um, obviously pillar two wasn't on the table at the same level as it is today when this was going on.
• 4:52
  SPEAKER_00: But clearly pillar two and how you disclose pillar two is going to be a part of the question when we get into our discussion around disaggregation.
• 5:00
  SPEAKER_00: It's going to be a question of what that might look like in your rate rec.
• 5:02
  SPEAKER_00: So we can definitely talk about that.
• 5:04
  SPEAKER_00: Okay.
• 5:04
  SPEAKER_01: Yeah, I think it's helpful for people to have that in the back of their mind as we start to get into this.
• 5:08
  SPEAKER_01: So, with all of that, lots of background there, um, you you mentioned that this is all about disaggregation, and you also talked about rate rec and income taxes paid.
• 5:18
  SPEAKER_01: So, why don't we run through each of those from a high level of what's expected?
• 5:23
  SPEAKER_00: Yep, so super, super high levels.
• 5:25
  SPEAKER_00: So today, if you think about it, um, public entities are currently required to reconcile their effective tax rate to their statutory tax rate.
• 5:35
  SPEAKER_00: That will still be the case in the new standard when we're looking at the rate rec.
• 5:38
  SPEAKER_00: That's still required.
• 5:40
  SPEAKER_00: But now, under existing gaps, it is focused on you disaggregate, if you will, you just disclose significant items.
• 5:48
  SPEAKER_00: And the definition of significant items really comes from SEC guidance, and that's what we call the 5% rule.
• 5:54
  SPEAKER_00: So it's 5% of your domestic statutory rate.
• 5:57
  SPEAKER_00: So in the US, that's around a percent, just over a percent.
• 6:01
  SPEAKER_00: Um, and so that's what's required today.
• 6:04
  SPEAKER_00: That same rate rec will be required, but under the final ASU, you will have categories, specific categories that are required to be disclosed.
• 6:13
  SPEAKER_00: And then within those categories, there will be some of those categories, I should say, there will be further disaggregation.
• 6:20
  SPEAKER_00: So, you know, the aim being more consistency across registrants as far as what they're disclosing and how they're disclosing that.
• 6:27
  SPEAKER_00: Uh, where you do have to provide some additional disaggregation, that is still based on that same 5% rule.
• 6:33
  SPEAKER_00: So we'll talk about that when we get into more of the details.
• 6:36
  SPEAKER_00: Um, just one notable change, uh, because I won't, you know, mention it's pretty high level, but just also today, you have a choice as a public company between disclosing um your rate rec in dollars or in currency or in percentages.
• 6:54
  SPEAKER_00: Under the new standard, you're required to do both.
• 6:56
  SPEAKER_00: So it's no longer elective.
• 6:57
  SPEAKER_00: So I'll just throw that out there.
• 6:59
  SPEAKER_00: And then in cash taxes paid, that's really all new.
• 7:02
  SPEAKER_00: So you're going to have to disclose cash taxes paid annually, uh broken down between federal, state, and foreign, and then further disaggregation using a 5% test, you know, 5% of the net um cash taxes paid to break it further by jurisdiction.
• 7:19
  SPEAKER_00: So we can talk a little bit more about that.
• 7:21
  SPEAKER_00: So that's, you know, the 500,000 foot level.
• 7:24
  SPEAKER_01: Yeah, still even at 500,000 feet, though, it's a lot of detail that's required.
• 7:30
  SPEAKER_01: And it's interesting because you mentioned consistency and comparability, but then going with that, it's also fairly prescriptive.
• 7:37
  SPEAKER_01: It sounds like like someone is going to be preparing this footnote, looking at the rule and making sure they're kind of ticking through and hitting each of those, because this is a lot to get through.
• 7:48
  SPEAKER_00: It is, but we'll talk about some areas where you could come to some, you're gonna have some judgment.
• 7:53
  SPEAKER_00: And so while the aim was consistency, we will hit on exactly that topic as we talk about some of the details and where judgments might be necessary and where companies might reasonably come to different conclusions.
• 8:05
  SPEAKER_01: All right.
• 8:05
  SPEAKER_01: Well, that's definitely uh that's always the places that people are interested in hearing about.
• 8:09
  SPEAKER_01: But first, before we get to that though, let's talk about the rate rec and some of those challenges related to that.
• 8:14
  SPEAKER_00: All right, well, let's start with the foreign tax effects, because that is by far the category that um I think is the biggest change.
• 8:22
  SPEAKER_00: You know, today companies are disclosing all of their foreign tax effects as just a single line item.
• 8:28
  SPEAKER_00: In the new standard, in the final standard, you are required to disclose um all foreign tax effects will be in one category.
• 8:38
  SPEAKER_00: Okay, so all foreign tax effects.
• 8:40
  SPEAKER_00: Even that used to be a question.
• 8:42
  SPEAKER_00: Used to be a question of do I, you know, put my foreign valuation allowance here in the foreign line, or do I put that over in my valuation allowance?
• 8:49
  SPEAKER_00: Well, that is very clear in this standard.
• 8:51
  SPEAKER_00: All foreign tax effects will go on a single line or in a single category, I should say.
• 8:57
  SPEAKER_00: But then incrementally, you have to break that category out by both jurisdiction and nature of item.
• 9:02
  SPEAKER_00: So what does that mean?
• 9:04
  SPEAKER_00: You I mentioned the 5% rule earlier, so that will come into play here.
• 9:09
  SPEAKER_00: So when you have a jurisdiction or an item, and I'll talk about that is that is greater than 5%, that 5% rule I mentioned earlier, of your domestic federal rate.
• 9:20
  SPEAKER_00: So again, if you're a US multinational, that's gonna be just over 1%.
• 9:24
  SPEAKER_00: If you have either of those things, you have to disaggregate that in the foreign category.
• 9:29
  SPEAKER_00: So what that might look like is you might have a jurisdiction, call it Ireland, where the impact in your tax provision to Ireland is greater than 5%, greater than that 5% rule.
• 9:42
  SPEAKER_00: And let's just imagine there are no individual items within Ireland that meet the rule.
• 9:48
  SPEAKER_00: So all you do is you disclose Ireland and the inf the effects in Ireland.
• 9:53
  SPEAKER_00: You could have that same jurisdiction in Ireland, but in addition to Ireland meeting the 5% rule, let's just say you've got a credit in Ireland that also meets the 5% rule.
• 10:05
  SPEAKER_00: Now you're gonna disclose Ireland, you're gonna show your rate differential, and then you're gonna show that credit.
• 10:10
  SPEAKER_00: So you're gonna be disaggregating Ireland down into what we what is called nature items.
• 10:16
  SPEAKER_00: And then the last category I like to point out to people is you could have a jurisdiction that in total doesn't meet that 5% rule.
• 10:24
  SPEAKER_00: So that would suggest in the U.S.
• 10:27
  SPEAKER_00: multinational fact pattern that it's pretty close to the U.S.
• 10:30
  SPEAKER_00: federal rate or statutory rate.
• 10:32
  SPEAKER_00: In that fact pattern, you could still have to disclose that jurisdiction if within that jurisdiction there is an item that is greater than the 5% rule or meets the 5% rule.
• 10:44
  SPEAKER_00: So this is the disaggregation we're talking about on the foreign tax effects.
• 10:48
  SPEAKER_00: Um, and I and I think it's gonna be the biggest change that, again, if you're going from a single line to disaggregating by jurisdiction and nature, it's going to require systems and processes.
• 10:59
  SPEAKER_00: You know, you're gonna be mapping your items differently, most likely, than you have before, and certainly at a level of detail that you've never disclosed before.
• 11:07
  SPEAKER_00: Um, so I do think that will be a big deal, and I do think that's gonna be um a huge focus and probably the heaviest lift for companies.
• 11:16
  SPEAKER_01: Well, yeah, and I'm just trying to think this through because depending in one year you may have something and then you might have something different in the next year.
• 11:25
  SPEAKER_01: And so it's not like you can just plan, oh, here it's this information I have to always capture.
• 11:29
  SPEAKER_01: You have to capture all the information and then be applying this test at the end of the year to do these disclosures.
• 11:36
  SPEAKER_01: Absolutely.
• 11:37
  SPEAKER_01: Um, and let me ask you a question then.
• 11:39
  SPEAKER_01: So if something, for example, in your fact pattern, you had this credit in Ireland that popped over um the 5%, but then the following year you have the same credit and it's less.
• 11:50
  SPEAKER_01: Do you still break how do you break it out or not?
• 11:53
  SPEAKER_01: Maybe this is judgment or no?
• 11:54
  SPEAKER_00: Well, so so again, you're showing a rate rec for all years that you're showing a PL.
• 12:01
  SPEAKER_00: So you've got three rate recs in there.
• 12:03
  SPEAKER_00: It met it in, let's say, year one.
• 12:05
  SPEAKER_00: So you have it in year one.
• 12:06
  SPEAKER_00: In theory, you're still gonna show it in year two.
• 12:08
  SPEAKER_00: You can't get rid of year one's disclosure.
• 12:10
  SPEAKER_00: So for consistency, that said, you know, if you argued it was immaterial, I suppose is there an argument?
• 12:16
  SPEAKER_00: I just I don't think there is.
• 12:17
  SPEAKER_00: I don't think there is, you know, I don't think that I think so it's gonna stay there until it drops off.
• 12:22
  SPEAKER_00: You could have that fact pattern though, where something was material in one year and then it drops off, and then that rate rec item goes away.
• 12:29
  SPEAKER_00: And there's no, you know, mandatory line items of you know uh disclosure within a jurisdiction unless you meet that 5% rule.
• 12:38
  SPEAKER_00: So that is your threshold.
• 12:40
  SPEAKER_01: And so then basically you could see changes, but something's gonna stay until it kind of rolls off.
• 12:45
  SPEAKER_01: Which makes sense.
• 12:46
  SPEAKER_01: That's like any other disclosure that we would expect to see.
• 12:49
  SPEAKER_01: So that's that that definitely makes sense.
• 12:51
  SPEAKER_01: So that's some things to look out for.
• 12:54
  SPEAKER_01: So what are some of the other areas that companies should be thinking about?
• 12:57
  SPEAKER_00: Yeah, I think the other really big area is the line item for changes in unrecognized tax benefits.
• 13:04
  SPEAKER_00: And I think here it might make sense to actually step back and talk about the categories for a minute.
• 13:11
  SPEAKER_00: So I mentioned at the outset that it requires there are eight categories, and I suppose there are really nine if you know you could have another.
• 13:18
  SPEAKER_00: So that's not counted in our eight, right?
• 13:20
  SPEAKER_00: In their eight.
• 13:21
  SPEAKER_00: Um so the categories um there's state if state tax effects and foreign tax effects.
• 13:28
  SPEAKER_00: So those are all state tax effects, uh, except for one I'll get to.
• 13:33
  SPEAKER_00: All state tax effects are on the state line, all federal tax effects are on the foreign, and then all of the other categories except one we're talking about, um, but all other categories except for unrecognized tax benefits are actually going to be through the domestic lens.
• 13:49
  SPEAKER_00: So again, we're using this U.S.
• 13:51
  SPEAKER_00: multinational as an example.
• 13:52
  SPEAKER_00: So, for example, one of the other categories is uh tax credits.
• 13:57
  SPEAKER_00: So if I'm a U.S.
• 13:58
  SPEAKER_00: multinational, I've got all my state effects on my state line, I've got all of my foreign effects on my foreign line, that includes any of their tax credits, right, that's in the foreign line.
• 14:08
  SPEAKER_00: But now I have a line for a category for my tax credits.
• 14:13
  SPEAKER_00: So within that tax credits category, that's from a US tax law.
• 14:16
  SPEAKER_00: So what are my US tax credits?
• 14:19
  SPEAKER_00: And tax credits happens to be one of the categories that you actually have to then further disclose by the 5%.
• 14:25
  SPEAKER_00: But you would have to further break that down.
• 14:27
  SPEAKER_00: So why do I give that as background before I get into that with certain tax benefits?
• 14:32
  SPEAKER_00: That is the one exception.
• 14:34
  SPEAKER_00: It is one of the eight categories, but it is the exception to everything that I just described.
• 14:39
  SPEAKER_00: So as a response, in response to significant feedback through the comment letter period, um, what the FASBE's final standard includes is that changes in unrecognized tax benefits may be aggregated on a single line rather than disaggregating them by jurisdiction.
• 14:58
  SPEAKER_00: So in this way, when I mentioned the eight categories and they all state effects, all um foreign effects, and then everything else, the uncertain, unrecognized tax benefits line, the changes in unrecognized tax benefits line is an exception to that.
• 15:12
  SPEAKER_00: So that can just be disclosed as a single worldwide, which would include your domestic and your foreign.
• 15:17
  SPEAKER_00: Now, that category is titled as uh changes in unrecognized tax benefits.
• 15:24
  SPEAKER_00: Also, in response to a fair bit of comment, there were lots of questions, and we'll talk about this about like netting.
• 15:31
  SPEAKER_00: Um, you mentioned like how where judgments might start to come in.
• 15:34
  SPEAKER_00: The FASB clarified that uh any of these categories, if I related items, uh, might seem like it would make more sense to put them together.
• 15:43
  SPEAKER_00: What they've said is you have to disclose them gross unless a specific exception was provided.
• 15:49
  SPEAKER_00: Unrecognized tax benefits is one of the two exceptions that was provided.
• 15:54
  SPEAKER_00: And in that case, basically what they said is that companies, registrants would offset their uh current year positions with their unrecognized tax benefits.
• 16:06
  SPEAKER_00: So, simple example, let's just say I've got a$100 RD credit, that would be on my tax credit line, um, and I have a$50 unrecognized tax benefit against that.
• 16:17
  SPEAKER_00: I'm gonna disclose$50, I'm not gonna disclose$100.
• 16:20
  SPEAKER_00: So that is um, those are two things around unrecognized tax benefits.
• 16:24
  SPEAKER_00: I think it was a great development that it is disclosed on a, you know, it can't it can be disclosed on a worldwide basis.
• 16:30
  SPEAKER_01: All right, and let me ask one clarifying question.
• 16:33
  SPEAKER_01: This is a little broader, because you mentioned that you are looking at this through a domestic lens.
• 16:38
  SPEAKER_01: And we used US, I think, as an example, right?
• 16:41
  SPEAKER_01: Because we do have some non-US companies that would apply US gaps.
• 16:45
  SPEAKER_01: So for example, if I was headquartered in another company, then my domestic tax would be whatever country I'm from.
• 16:52
  SPEAKER_01: That might be domicile.
• 16:53
  SPEAKER_01: Yes.
• 16:53
  SPEAKER_01: And maybe stating the obvious, but I just wanted to make that clear because I know we have some non-U.S.
• 16:58
  SPEAKER_00: listeners.
• 16:59
  SPEAKER_00: So you're absolutely right, Heather.
• 17:01
  SPEAKER_00: Um, I'm using that example, but in all cases, it starts with your federal national rate, your rate rec.
• 17:07
  SPEAKER_00: So if you're in um if you're a US registrant, but your um domicile is in uh Switzerland, you're starting with Switzerland.
• 17:17
  SPEAKER_00: Yeah.
• 17:17
  SPEAKER_00: Okay, that's helpful.
• 17:18
  SPEAKER_01: And again, that might be sort of stating the obvious, but I think it's it's good.
• 17:22
  SPEAKER_01: So one of the categories you mentioned a few times was foreign tax effects.
• 17:27
  SPEAKER_01: And we also talked about this unrecognized tax benefits.
• 17:31
  SPEAKER_01: But then what about the state and local?
• 17:33
  SPEAKER_01: What are some of the judgments that would be involved there?
• 17:36
  SPEAKER_00: Yeah, so not a lot there.
• 17:37
  SPEAKER_00: Uh state and local is its own category.
• 17:40
  SPEAKER_00: So all your state effects are on one line item, but it does not require any disaggregation.
• 17:45
  SPEAKER_00: The only thing that the standard requires, and in the actual standard, they gave an example, and the state was almost like a footnote.
• 17:53
  SPEAKER_00: Um, the only thing that you have to do is that you do have to disclose uh a list of the states that make up the majority of your state of your state provision.
• 18:03
  SPEAKER_00: And um, they did clarify that that's just majority as in greater than 50, so simple.
• 18:09
  SPEAKER_00: Um, and then they also provided some guidance that in calculating or in determining the states, you start at the state that has the highest and you go down until you get over 50 percent.
• 18:19
  SPEAKER_00: So that was actually all codified.
• 18:20
  SPEAKER_00: Uh so that's what you would do with state and local.
• 18:22
  SPEAKER_01: Interesting.
• 18:23
  SPEAKER_01: So then no need to give individual amounts by not amounts, you would literally just disclose states.
• 18:29
  SPEAKER_00: So like I forget which ones they used in the example, but if let's say California, Pennsylvania, New York were the three states that gave me over.
• 18:36
  SPEAKER_00: So I would list them.
• 18:38
  SPEAKER_01: And no percentages next to them.
• 18:39
  SPEAKER_01: Uh nope.
• 18:40
  SPEAKER_01: Well, okay, that's helpful.
• 18:41
  SPEAKER_01: So then we've covered three categories, but you said there were eight slash nine.
• 18:46
  SPEAKER_01: So from a federal tax impacts perspective, then those are the last five categories.
• 18:50
  SPEAKER_01: What are the categories and what should people be looking out for?
• 18:54
  SPEAKER_00: So cross-border taxes, I mentioned that one.
• 18:57
  SPEAKER_00: Um, and and that is one I think when you mention judgment, there'll be some judgment in those cases.
• 19:03
  SPEAKER_00: So cross-border taxes is one of the jurisdictions that you have to disclose or break out when you have something greater than 5%.
• 19:12
  SPEAKER_00: This is really about the effect of incremental income taxes that are imposed by the country of domicile on income earned in foreign jurisdictions.
• 19:22
  SPEAKER_00: So examples of this would be we've talked about this in the past, but the guilty provisions, right?
• 19:27
  SPEAKER_00: You know, other US provisions like BEAT or uh FDII, these are all provisions that came through TCGA.
• 19:35
  SPEAKER_00: But I think with BEAT and FDII, that you're gonna see some people won't believe that's cross-border because it's really a domestic item.
• 19:42
  SPEAKER_00: The cross-border also allows this is one where uh it gets you to the second exception I mentioned about netting.
• 19:49
  SPEAKER_00: So the FASB did provide that, um, and they gave guilty as an example.
• 19:55
  SPEAKER_00: When you have a tax and there's a benefit in the same period based on that same income, you can net that.
• 20:03
  SPEAKER_00: So again, a pretty simple example is guilty.
• 20:06
  SPEAKER_00: So you have a guilty provision, but then you get guilty foreign tax credits.
• 20:10
  SPEAKER_00: Now, guilty is tax, it's tax in the US on US companies.
• 20:15
  SPEAKER_00: And um the foreign tax credit is also for the US.
• 20:19
  SPEAKER_00: And so they're basically allowing companies to net those such that when you see guilty, it would be your net, actual net impact of guilty, for example.
• 20:28
  SPEAKER_00: Um, so so that is an area where they clarified it in the final standard.
• 20:33
  SPEAKER_00: Tax credits, I mentioned that's another one that requires disaggregation if you have items greater than 5%.
• 20:39
  SPEAKER_00: Um, changes in valuation allowance, that is all changes in valuation allowance, meaning it's current year valuation allowance, as well as changes maybe that you made on judgments from prior years.
• 20:49
  SPEAKER_00: Um, no disaggregation on that category.
• 20:52
  SPEAKER_00: There is um non-taxable, non-deductible items.
• 20:56
  SPEAKER_00: I would just call that your permanent items.
• 20:58
  SPEAKER_00: I was about to ask you that question.
• 20:59
  SPEAKER_00: Yeah.
• 21:00
  SPEAKER_00: Okay.
• 21:00
  SPEAKER_00: Because there was even some conversations about some stock-related items that are neither non-taxable nor non-deductible.
• 21:06
  SPEAKER_00: And there was a question as to like where do those go.
• 21:09
  SPEAKER_00: And the FASBI said use judgment, but it's perfectly fine in your non-taxable, non-deductible items.
• 21:15
  SPEAKER_00: So I like to think of that as just expenses.
• 21:18
  SPEAKER_01: All right.
• 21:18
  SPEAKER_01: So, Jen, now I think if I've been counting right, we've hit seven out of the eight, or so four of the federal.
• 21:24
  SPEAKER_00: So what's the fifth one?
• 21:26
  SPEAKER_00: The fifth one is a change in tax laws.
• 21:27
  SPEAKER_00: So um that they've put some language in the standard that it should really match up to essentially the impact at the date of enactment that you'd book in continuing ops, essentially.
• 21:38
  SPEAKER_00: That's the rough explanation of it.
• 21:40
  SPEAKER_00: Um, but that should just be disclosed.
• 21:42
  SPEAKER_00: But it uh we have had some questions come up on that.
• 21:45
  SPEAKER_00: So I will just say the key here is it's changes at date of enactment and it's only changes in tax laws or rates.
• 21:51
  SPEAKER_01: So if I'm following correctly here, you made a point that for unrecognized tax benefits, that would be worldwide.
• 21:57
  SPEAKER_01: But so then for this particular change.
• 22:00
  SPEAKER_01: Changes in tax rate, that would be your federal only.
• 22:03
  SPEAKER_01: And then if you had changes in tax rates for state or local or for foreign, those would go in those.
• 22:08
  SPEAKER_01: You got it.
• 22:09
  SPEAKER_00: That's exactly right.
• 22:10
  SPEAKER_00: So you've got it exactly.
• 22:11
  SPEAKER_00: And I think it's really important to keep reminding ourselves of what you just summarized.
• 22:15
  SPEAKER_00: So this is just if you're a U.S.
• 22:17
  SPEAKER_00: multinational, these are just changes for U.S.
• 22:20
  SPEAKER_00: federal changes in tax laws or rates.
• 22:22
  SPEAKER_00: If you have that foreign, it's what you said.
• 22:24
  SPEAKER_00: And if it's big enough in a foreign jurisdiction, you're going to have to disclose it as we talked about earlier.
• 22:29
  SPEAKER_01: That's right.
• 22:30
  SPEAKER_00: So if you had it in a particular jurisdiction and that impact was greater than 5%, that would be a nature that you got to disclose in that foreign line.
• 22:38
  SPEAKER_00: All right, so this can get very complicated very fast then.
• 22:40
  SPEAKER_00: Yeah, the example that's in this final standard as well.
• 22:44
  SPEAKER_00: I mean, keep in mind you're now showing three years by percentage and currency, and then eight categories and disaggregation within uh you know several of those.
• 22:55
  SPEAKER_01: So it's like a whole page of information.
• 22:57
  SPEAKER_01: Or more than a page.
• 22:58
  SPEAKER_01: Okay, more than a page.
• 22:59
  SPEAKER_01: Um so I one question then on these categories, because when you describe them, it seems so straightforward of something's in this category or something's in that category.
• 23:08
  SPEAKER_01: But I'm presuming when you get into it, there is going to be some judgment between categories.
• 23:14
  SPEAKER_00: That's right.
• 23:15
  SPEAKER_00: And and this I think is where um you know there's only so much, like you mentioned, I think earlier about it being prescriptive.
• 23:22
  SPEAKER_00: And I think that's fair, right?
• 23:24
  SPEAKER_00: There are eight categories, there are rules, there are specific categories you have to disaggregate, but we cannot have a rule for everything that might evolve.
• 23:32
  SPEAKER_00: You mentioned Pillar 2, who knew, you know, 10 years ago that was coming, right?
• 23:36
  SPEAKER_00: And so when you think about that, this is where I mentioned BEAT or FDII from US tax law.
• 23:44
  SPEAKER_00: You know, are those cross-border or are they something else?
• 23:48
  SPEAKER_00: Um, the same thing about being able to net, like your foreign tax credit against your guilty.
• 23:54
  SPEAKER_00: Um, there are just going to be a host of questions where companies will likely come to different decisions or could come to different conclusions as to where something is disclosed or not.
• 24:04
  SPEAKER_00: Where they can't take the judgment is netting things.
• 24:08
  SPEAKER_00: So again, there's only two exceptions to the netting.
• 24:11
  SPEAKER_00: So people have asked, well, if I have a foreign tax credit or if I have an RD credit, shouldn't I put my valuation allowance against it?
• 24:18
  SPEAKER_00: Because I should tell my reader I'm not really going to get the benefit.
• 24:21
  SPEAKER_00: That is not, in fact, how it works.
• 24:23
  SPEAKER_00: All changes in valuation allowance belong on the valuation allowance line.
• 24:27
  SPEAKER_00: They've clarified it.
• 24:28
  SPEAKER_00: So in that case, no, you wouldn't.
• 24:30
  SPEAKER_00: The only thing you could net would be if you had an uncertain tax position against that credit, as I described earlier.
• 24:37
  SPEAKER_00: So there is judgment, but there isn't crossing, if you will, or netting in a transaction that has multiple pieces to it, those multiple pieces are going to need to be disclosed gross in the categories.
• 24:49
  SPEAKER_01: So then, Jen, let me ask you a question because we were just talking about this in my mind, one page of data.
• 24:54
  SPEAKER_01: You said probably more than one.
• 24:56
  SPEAKER_01: But you know, for some companies, they may not have all of these categories, or if they do have these categories, they may not be material.
• 25:03
  SPEAKER_01: So then how does that work?
• 25:05
  SPEAKER_00: Do you have to present it anyway, or what's required?
• 25:08
  SPEAKER_00: Yeah, great question.
• 25:08
  SPEAKER_00: It's the question everybody's been asking and frankly asked as part of the comment, period.
• 25:13
  SPEAKER_00: But as you would expect, they said they are not going to codify materiality in the individual standards, right?
• 25:22
  SPEAKER_00: There is a materiality standard, 105, and they did specifically comment on it, and they said that that materiality standard applies to all of GAP, including disclosures.
• 25:31
  SPEAKER_00: So in your question, and I've had this question from people, a number of clients who've just said, are you telling me they're required eight categories?
• 25:39
  SPEAKER_00: And therefore, if I have zero, I still have to align and have zero.
• 25:42
  SPEAKER_00: The answer is no.
• 25:43
  SPEAKER_00: You've got to look at your materiality.
• 25:45
  SPEAKER_00: And by the way, that's naturally, and you would expect that to be the case.
• 25:50
  SPEAKER_00: That's naturally going to this idea of consistency across categories.
• 25:54
  SPEAKER_00: The reality is materiality will come into that.
• 25:56
  SPEAKER_00: Not every company has the same level of materiality.
• 25:59
  SPEAKER_00: So what might be material for one won't be for another.
• 26:02
  SPEAKER_00: So there's not going to be perfect comparability, uh, nor do I think you could ever have it.
• 26:07
  SPEAKER_00: Um, but that is a really important point.
• 26:10
  SPEAKER_00: And so you will think about materiality just like you do for the rest of Gap.
• 26:14
  SPEAKER_01: So if I'm just trying to think this through, if let's say I go through and I disclose all my material items, but now let's say my total rate reconciliation is one amount and I haven't accounted for that full amount, and those immaterial items go into another line.
• 26:29
  SPEAKER_00: That's where I would think you have other, and you could also have other because you have something that's not perfectly aligned with one of the categories.
• 26:38
  SPEAKER_00: Um and so an other exists, but you're right.
• 26:41
  SPEAKER_00: And I think that's exists today.
• 26:43
  SPEAKER_00: In other words, there's other today.
• 26:45
  SPEAKER_00: When you look at rate reconciliations, that's always a line item.
• 26:48
  SPEAKER_00: And to date where the SEC had been focused in when we see comment letters, it's ensuring that you're not either inappropriately combining, aggregating, or disaggregating items under current gap in order to avoid the 5% roll, right?
• 27:02
  SPEAKER_00: So the the SEC today looks at that.
• 27:05
  SPEAKER_00: So the other category is just, I think it's impossible not to have another.
• 27:09
  SPEAKER_00: It's it's highly likely.
• 27:10
  SPEAKER_01: Yes, just to your point, you have to be careful and not be netting stuff into that category.
• 27:14
  SPEAKER_01: That's going to be where you have an issue.
• 27:16
  SPEAKER_00: Absolutely.
• 27:17
  SPEAKER_00: And now it's not just coming from the SEC, it's codified in gaps.
• 27:20
  SPEAKER_01: Yes, yes.
• 27:21
  SPEAKER_01: From and from that point of view, I think some of this guidance is helpful for prepares because it does give you a roadmap of what is needed and what the expectations are.
• 27:30
  SPEAKER_01: So then we obviously talked a lot about the rate rec, but you also mentioned income taxes paid disclosure.
• 27:37
  SPEAKER_01: And so what are the requirements there?
• 27:39
  SPEAKER_00: Yeah, so I think I mentioned it at the outset because there is only it's I'll call it two requirements.
• 27:45
  SPEAKER_00: Um they're very important because they don't exist today, so people need to be preparing for them.
• 27:50
  SPEAKER_00: So importantly, what we've been talking about in the rate rec applies to public business entities.
• 27:56
  SPEAKER_00: Um the cash disclosures apply to all entities.
• 28:00
  SPEAKER_00: So so that's probably an important point as at the outset.
• 28:05
  SPEAKER_00: Um, and then the first piece is that you're gonna disclose annually uh federal, state, and foreign.
• 28:11
  SPEAKER_00: And so that's required.
• 28:13
  SPEAKER_00: Now, this disaggregation I mentioned on the 5%, this 5%, so what you're disclosing, let me be clear, is you're disclosing the net cash taxes paid in each federal, state, and foreign.
• 28:26
  SPEAKER_00: Then you're further disaggregating based on 5% of net cash taxes paid.
• 28:32
  SPEAKER_00: And so I just want to stress here this is for any jurisdiction.
• 28:37
  SPEAKER_00: So people um, because foreign effects was such a focus area of this this project throughout, people have put it in their heads that it's breaking out the foreign.
• 28:47
  SPEAKER_00: Again, I said federal state foreign, that it's breaking out the foreign.
• 28:51
  SPEAKER_00: And that's true.
• 28:52
  SPEAKER_01: That's why I asked the OECD question partly.
• 28:54
  SPEAKER_00: So yeah, so it's true that it is on your foreign, but it it could be state as well.
• 28:59
  SPEAKER_00: If you have it's any jurisdiction that has net cash tax paid greater than five percent of total net cash taxes paid.
• 29:09
  SPEAKER_00: So I think that's just important.
• 29:10
  SPEAKER_00: It's any jurisdiction, it applies to all entities.
• 29:13
  SPEAKER_00: And then the other thing that I would point out, and you hit this in the rate rec, and this is a distinct difference from the rate rec.
• 29:20
  SPEAKER_00: So there is no comparative when it comes from cash taxes paid.
• 29:24
  SPEAKER_00: So you are disclosing on a current year.
• 29:26
  SPEAKER_00: So in this case, with cash taxes paid, you could have cash taxes paid for jurisdiction A last year that is no longer meeting the 5% test.
• 29:38
  SPEAKER_00: You don't disclose it in the current year.
• 29:39
  SPEAKER_00: So there's no comparative for the cash taxes paid.
• 29:43
  SPEAKER_01: So then, Jen, I think one thing that immediately comes to mind as an accountant is we think about accruals.
• 29:48
  SPEAKER_01: So when I think about net cash taxes paid, what does that actually mean?
• 29:54
  SPEAKER_01: What are you capturing in that?
• 29:56
  SPEAKER_00: Yeah.
• 29:56
  SPEAKER_00: So you're capturing what you paid, like truly paid to the government, um, and then net of any refunds.
• 30:03
  SPEAKER_00: So um, you know, if you think about it like if you are net settling on something, you it's a net.
• 30:09
  SPEAKER_00: It's not like I look at just the payments and I ignore those refunds.
• 30:13
  SPEAKER_01: All right, that's helpful.
• 30:15
  SPEAKER_01: And then the other thing that you made a big point of um that I just want to come back to is the fact that this portion applies to all entities, public and private.
• 30:24
  SPEAKER_01: That's right.
• 30:24
  SPEAKER_00: That's it really important.
• 30:25
  SPEAKER_00: It is.
• 30:26
  SPEAKER_00: Because for the rest of the disclosures, there are some differences.
• 30:29
  SPEAKER_00: So non-public business entities don't have to disclose a rate rec today, and they don't under the final ASU.
• 30:35
  SPEAKER_00: Um, there is some language in that they should be thinking about the significant categories, and I think you can interpret that to be those categories we talked about.
• 30:43
  SPEAKER_00: Um, so like that rate rec isn't necessary, but but this disclosure, this cash tax is paid one is.
• 30:48
  SPEAKER_01: Okay, so Jen, that's helpful.
• 30:50
  SPEAKER_01: But I guess one follow-up question then is that in the ASU, they actually use some the terminology is not exactly the same as what was defined in ASC 740.
• 31:01
  SPEAKER_01: So can you just walk us through that?
• 31:02
  SPEAKER_01: Because I think there could be some implications from that.
• 31:05
  SPEAKER_00: Oh, you're you're absolutely right, Heather, and it is important.
• 31:07
  SPEAKER_00: So the standard, the final standard, replaces the term public entity and non-public entity, which were previously defined in 740 with public business entity, which is a term that's actually defined in the master glossary.
• 31:23
  SPEAKER_00: And it also removes the definition of non-public entity and replaces that term with entities other than public business entities.
• 31:32
  SPEAKER_00: And that doesn't have a separate definition, it just encompasses everything that doesn't meet the definition of public business entity.
• 31:40
  SPEAKER_00: And so you've probably dealt with this in other areas, Heather, but this definition, it's all just part of a greater effort from the FASB that goes back to I think 2013 when this new definition of public business entity came into the master glossary.
• 31:55
  SPEAKER_00: But at that time, what they said is they weren't changing it throughout the entirety of codification.
• 32:00
  SPEAKER_00: They were just going to change it as you know updates were made.
• 32:02
  SPEAKER_00: And of course, now here we are with the new standard.
• 32:05
  SPEAKER_00: So 740 has now been updated.
• 32:08
  SPEAKER_00: Now, I think that's really important here, Heather, because as we look at that, there were multiple definitions of public entity in different areas of GAAP, including 740, which weren't all the same and focused really on an entity with securities that were publicly traded.
• 32:27
  SPEAKER_00: So now the public uh the definition of public business entity, it pulls in entities who are required to file or furnish financial statements with the SEC.
• 32:38
  SPEAKER_00: So that could include entities like voluntary filers, um, certain broker dealers that weren't previously considered a public entity under the definition 740.
• 32:49
  SPEAKER_00: So everything we just talked about, like that rate rec and all that goes with it, if you meet the definition of a public business entity as codified in the master glossary, you will need to do those disclosures now.
• 33:01
  SPEAKER_00: So I think that's a really important question.
• 33:03
  SPEAKER_01: Well, and it's a really good reminder.
• 33:05
  SPEAKER_01: And hopefully for most companies, because the FASB has moved to using this PBE definition so much for adoption dates for various standards, hopefully companies will be focused on if they are a PBE and will recognize they need to make these disclosures.
• 33:21
  SPEAKER_00: Well, and we've definitely had questions come up.
• 33:24
  SPEAKER_00: It might have been inadvertently, like there was a question that came up that then caused somebody to go look and so agreed.
• 33:30
  SPEAKER_00: And you know, we'll of course have to think about how we communicate that out to make sure people are thinking that through.
• 33:35
  SPEAKER_01: Yeah.
• 33:35
  SPEAKER_01: So basically, long story short, make sure you know if you're a PBE or not.
• 33:40
  SPEAKER_01: So you can make these disclosures if you need to and prepare for the right rack.
• 33:43
  SPEAKER_01: At the right timing.
• 33:44
  SPEAKER_01: At the right timing.
• 33:45
  SPEAKER_01: All right.
• 33:45
  SPEAKER_01: So, Jen, one thing is you talked about we talked about this definition and the ASC 740 had a different definition that they were using for public entities and non-public.
• 33:56
  SPEAKER_01: Now we have this new ASU.
• 33:58
  SPEAKER_01: Are there still parts of 740 that use the other definition?
• 34:01
  SPEAKER_01: Nope.
• 34:02
  SPEAKER_01: Okay.
• 34:02
  SPEAKER_00: No, 740 has been updated.
• 34:04
  SPEAKER_00: So 740 is just public business entities and um entities other than public business entities.
• 34:11
  SPEAKER_00: Okay.
• 34:11
  SPEAKER_00: That's helpful.
• 34:11
  SPEAKER_01: So at least there's not two different No, not within 740.
• 34:14
  SPEAKER_01: Not within 740.
• 34:15
  SPEAKER_01: So that's the least helpful.
• 34:16
  SPEAKER_00: I do think those other definitions still exist in other parts of the Gap yet.
• 34:19
  SPEAKER_00: Yes.
• 34:19
  SPEAKER_00: Yeah.
• 34:20
  SPEAKER_01: And I will tell you because when working on the disclosure checklist project, that can make things very complicated for different types of companies to know what disclosures to make.
• 34:27
  SPEAKER_01: So it's a very key, key issue.
• 34:29
  SPEAKER_01: So then maybe another question is I know that the exposure draft had also proposed some other changes to existing disclosures.
• 34:36
  SPEAKER_01: So where did we land with some of those?
• 34:39
  SPEAKER_00: Yeah, so there were a few.
• 34:40
  SPEAKER_00: Um there are really three big ones that were made, and these really came out of the prior exposure drafts and had general consensus around them.
• 34:48
  SPEAKER_00: So one is that the you have a disclosure between domestic and foreign of pre-tax, and that's actually just codifying an SEC rule.
• 34:57
  SPEAKER_00: Um similarly, you have a disclosure of your income tax expense by federal state foreign, um, your provision in total.
• 35:06
  SPEAKER_00: And so that's also just codifying the SEC rule.
• 35:10
  SPEAKER_00: And so then beyond that one, there is currently in GAAP a requirement to disclose changes in unrecognized tax benefits that you expect in the next 12 months.
• 35:20
  SPEAKER_00: They removed that disclosure.
• 35:21
  SPEAKER_00: That's not to say you don't still have to address it because you you get it, you have to take a look at 275 to just make sure you're capturing it if you have something under those rules.
• 35:30
  SPEAKER_00: But this was a rule that people didn't feel like was particularly um helpful in the ability to make estimates and dealing with that.
• 35:38
  SPEAKER_00: So they did remove that.
• 35:39
  SPEAKER_00: And then the last thing they did is remove another disclosure that really has to do with when you're making um an outside basis assertion.
• 35:48
  SPEAKER_00: So we talk about APB 23.
• 35:51
  SPEAKER_00: And so there are three requirements in GAAP today.
• 35:54
  SPEAKER_00: They have removed one of those in the final ASU.
• 35:57
  SPEAKER_00: So once you've actually adopted the standard, and that is that you no longer need to disclose the gross temporary difference related to the deferred tax liabilities that have not been recognized because of the exception.
• 36:08
  SPEAKER_00: So really what this gets to is that used to be required, uh, but with TCGA, where you had current taxation of all of those old earnings and profits, the disclosure just doesn't really make sense today because of how that works now.
• 36:23
  SPEAKER_00: So um, so I think those were all great changes.
• 36:26
  SPEAKER_01: All right.
• 36:26
  SPEAKER_01: So at least some small benefits in exchange for one to two pages more information.
• 36:32
  SPEAKER_01: Um so one of the things that really caught my ear when we were talking is you made a comment at some point about preparing for the disclosures, because obviously huge amount of work that's going to need to be done to really make sure that you have the right controls, processes, and everything in place.
• 36:48
  SPEAKER_01: So, from a timing point of view, how much time do companies have?
• 36:51
  SPEAKER_00: Yeah, so so the standard is effective for years beginning after December 15, 2024.
• 36:59
  SPEAKER_00: So if you think for public business entities, one extra year for entities other than public business entities.
• 37:05
  SPEAKER_00: And so if you think about that for a calendar year company, that's going to mean 2025 annual report, um, we'll have those your financial annual financial statements will have the new rules.
• 37:16
  SPEAKER_00: Now, the standard provides that um you adopt on a prospective basis.
• 37:21
  SPEAKER_00: However, it permits retrospective application or adoption, I should say.
• 37:26
  SPEAKER_00: And so I think when you think about timing, there is time, but what we've been encouraging everybody to do is to actually take those financial statements that you just filed.
• 37:37
  SPEAKER_00: Again, if I'm focused on a calendar year for a moment, take those annual financial statements from 2023, run it through your system using the new rules, using the guidance in the ASU.
• 37:49
  SPEAKER_00: In this way, you can decide whether you want to actually adopt only prospectively or actually do it on a retrospective basis.
• 37:59
  SPEAKER_00: Because if you don't do it retrospective, there might be very good reasons for not doing it, and you're clearly allowed not to do it.
• 38:05
  SPEAKER_00: Yes.
• 38:06
  SPEAKER_00: So, but for some companies, they may look at that and say in 2025 you'd be disclosing apples and oranges.
• 38:13
  SPEAKER_00: We just talked about that difference, right, in these rate racks.
• 38:17
  SPEAKER_00: So if you don't adopt retrospectively, 2025 will be under the new rules and all of those details, but 24 and 23 will still be under the old rules.
• 38:26
  SPEAKER_00: And so I would argue that companies have the the time right now, if they take having just completed those financial statements, run 23 through.
• 38:37
  SPEAKER_00: That gives you two at a minimum two benefits.
• 38:40
  SPEAKER_00: One, it allows you to figure out where the holes are in your systems and processes where you might need to change something in order to get the data that you need to be compliant.
• 38:49
  SPEAKER_00: Um, and two, it allows you to do it in using that 23 data.
• 38:54
  SPEAKER_00: Then 24, you could run in parallel, still not changing my 24 close cycle, but run in parallel such that when I get to 25, I've got decision-making ability to say what is most useful to an it to a user.
• 39:06
  SPEAKER_00: And I actually have the choice to do it prospectively or retrospectively, versus getting to 25 and deciding you wanted to do it retrospectively.
• 39:15
  SPEAKER_00: That that would be pretty hard to go and redo that for two years.
• 39:18
  SPEAKER_01: Yeah, but versus the way you're describing it actually seems obvious practically that just start now and you'll have the data and it really won't be a scramble then when you get to 2025, and you'll have time to make some of these judgments, make sure you have the right people in senior management, the board involved, everything else.
• 39:34
  SPEAKER_01: So it makes sense.
• 39:35
  SPEAKER_00: And it is something that we're already seeing companies do.
• 39:37
  SPEAKER_00: I know that I've received a number of questions just in the last few weeks around the standard and the disclosures.
• 39:43
  SPEAKER_00: So people are dry running it, which I think is fantastic for the reasons you said.
• 39:47
  SPEAKER_01: All right.
• 39:48
  SPEAKER_01: So uh we're close to the end, but I always like to ask any final thoughts or words of wisdom for people as they start to tackle this new standard.
• 39:56
  SPEAKER_00: Look, I I would just say don't uh don't underestimate the amount of work.
• 40:00
  SPEAKER_00: Um, you know, I think that that companies know this data at some level, but not to be able to produce it in an auditable set of financial statements.
• 40:11
  SPEAKER_00: And so I I would I would not um I would I would take advantage of the time that you've got now and just not as not underestimate the effort it might take and just get prepared now.
• 40:22
  SPEAKER_00: I I really think that's probably the best um advice I could give.
• 40:26
  SPEAKER_01: All right.
• 40:26
  SPEAKER_01: Well, Jen, as always, thanks so much for your wisdom and I appreciate you joining me today.
• 40:30
  SPEAKER_01: Thanks for having me.
• 40:32
  SPEAKER_01: That's our show for today.
• 40:35
  SPEAKER_01: Tune in next week for more fresh episodes so that you never miss any of our audio content.
• 40:40
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  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
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