Navigating Financial Statement Reporting and Disclosures

HOST: BROOKS: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Today we are talking about financial statement reporting rules and required disclosures of income tax information.

HOST: BROOKS: This is not our usual tax topic, but reporting income tax accounts and activity in a company's financial statements is an important part of understanding a company's financial position and results. Accounting regulators continue to increase the detail and disclosures regarding taxes in the financial statements.

HOST: BROOKS: Joining today’s conversation are Will Billops, partner and leader of our Tax Provision Services team, and Lisa Macri, director with our Tax Provision Services team. Will, how's it going today?

WILL BILLOPS: It's going pretty well, Brooks. This is an exciting time for us with a lot of legislative change on the horizon, both on the tax side and with the codification and implementation of ASU 2023-09. I'm in the Nashville office and looking forward to the discussion today.

HOST: BROOKS: Thank you for joining us. Lisa, how are you doing?

LISA MACRI: I'm doing well. I'm happy to be part of this discussion. I'm joining from Atlanta, Georgia.

HOST: BROOKS: I'm in Richmond, Virginia today. It's relatively balmy — about 50 degrees and sunny, which is much warmer than the last few weeks. Joining me as always is Sarah McGregor.

SARAH MCGREGOR: Life is good. This is the first 24-hour period where we've been above freezing the whole time, so I hope the worst of winter is over. We're entering our super-busy tax season period with a lot of activity: finishing 2023 returns, working on 2024 returns, planning for 2025, and everyone wondering about 2026.

HOST: BROOKS: It is a strange alignment of tax years. All right, on to today's topic. A little background: the FASB sets the rules for information included in audited financial statements. For a number of years, the FASB has considered changes to require more information about income taxes in financial statements.

HOST: BROOKS: Last year, ASU 2023-09 was introduced. It will require companies to break out more tax information by jurisdiction. This is particularly important and onerous for companies with significant operations in multiple international locations. ASU 2023-09 is not the only tax reporting challenge companies will work through this year.

HOST: BROOKS: Will, let's take it from the top. What's the big picture on what ASC 740 is and why it is important for financial reporting?

WILL BILLOPS: ASC 740 is important because it gives financial statement users a snapshot of a company's tax position. It breaks out components of the company's current income tax position and reflects taxes or benefits that will be realized in future periods due to the reversal of deferred tax assets and liabilities.

WILL BILLOPS: Many financial statement users focus on elements driving the company's effective tax rate. ASC 740 provides detailed information about items impacting total income tax expense in the income statement and the income tax payable.

HOST: BROOKS: Lisa, that's a lot to cover, and it's more than a tax return. What are some common challenges companies face in applying ASC 740 to their financial statements?

LISA MACRI: Common challenges include implementing and adopting constant changes to tax legislation while meeting FASB reporting requirements. Complex entity structures such as multinationals, multi-state operations, and cross-border transactions create reporting challenges when accurately reflecting transaction impacts in the financial statements.

LISA MACRI: We also see companies not leveraging appropriate technology that would assist in meeting financial reporting requirements. Finding the right tools and using them within compressed time frames can be difficult.

HOST: BROOKS: Will, about a year ago we discussed ASU 2023-09 with you and Brian Dill, our head of International Tax Services. What can you tell us about ASU 2023-09 and why is it more important now?

WILL BILLOPS: ASU 2023-09 is close to adoption. Public companies are required to adopt for 2025, and private entities for 2026. ASU 2023-09 is a fundamental change to prior reporting requirements and creates a roadmap for income taxes with detailed financial statement disclosures.

WILL BILLOPS: The pronouncement expands transparent reporting of income taxes and creates strict parameters for distinct buckets for effective tax rate disclosures, including when and how additional details should be included. New requirements, such as income taxes paid disclosures, will be required.

WILL BILLOPS: The most challenging aspect is the disaggregation of certain categories now required to be disclosed within the financials. This is particularly challenging for multi-state and multinational entities taxed in multiple jurisdictions because the disclosure of income taxes across jurisdictions becomes more transparent and requires much more information.

HOST: BROOKS: Disaggregation tends to make people uncomfortable. ASU 2023-09 also changes the rate reconciliation schedule, requiring categories that meet a threshold to be further disaggregated. Lisa, how have you and your team worked with companies on the rate front?

LISA MACRI: We have communicated these changes with our public company clients required to adopt ASU 2023-09 in 2025. We've helped clients understand which categories require disaggregation and what that means for upgraded reporting processes.

LISA MACRI: We've assessed clients that might want to early adopt the pronouncement and begun implementing new reporting processes, including leveraging technology to assist with the disaggregation of new categories.

HOST: BROOKS: For many private companies, this could sound daunting. Will, what should CFOs and tax directors of multinational companies be thinking about now? What should their first step be?

WILL BILLOPS: CFOs need to ensure their organizations understand the additional information required for enhanced reporting. They should determine the best way to gather this information internally and be familiar with the categories that require disaggregation to see whether their company meets the enhanced reporting thresholds in ASU 2023-09.

WILL BILLOPS: This is top of mind because a lot of additional information will be needed. Companies will need to data-mine to obtain the answers required for disclosure.

HOST: BROOKS: Enough about disaggregation. Let's talk about some good news: the transferability of energy credits. I've heard from many C-Corporations interested in acquiring these credits. Lisa, what are you seeing and how does this fit into financial reporting of taxes?

LISA MACRI: We've seen many companies take advantage of this new legislation in 2024 and 2025, both on the buyer and seller sides of transferable energy credits. We've leveraged the guidance within ASC 740 on accounting for both the buy side and sell side of these credits.

LISA MACRI: The key is understanding the nature of the credit and the nature of the transaction, and how energy credit transactions impact each component of the income tax disclosure, including current income tax, deferred balances, and deferred taxes.

HOST: BROOKS: Let's pivot to acquisitions and dispositions. Lisa, what nuances should CFOs consider in financial reporting for these transactions?

LISA MACRI: Different ways to structure a transaction can achieve similar overall results but may have different tax and financial reporting consequences. Deal structure can affect purchase accounting and the reporting of deferred tax assets and liabilities.

LISA MACRI: It's important to understand the advantages and disadvantages of different deal structures and how transactions need to be reported.

HOST: BROOKS: Now to an exciting area: pass-through entities and pass-through entity tax rules. As a partner in a partnership, they bring benefits but also complexity. Generally, pass-through entities such as partnerships or S corporations do not have income tax provisions. Will, how does the prevalence of PTE elections impact financial reporting?

WILL BILLOPS: The new pass-through entity tax regime has changed the landscape. The AICPA and others have published examples and guidelines related to this. Ultimately, the treatment depends on determining when the entity bears the burden of the liability.

WILL BILLOPS: Whether the liability falls on the pass-through entity itself or on another party determines whether the entity has an income tax to present in the financial statements. PTE elections need to be analyzed jurisdiction by jurisdiction to determine whether the entity, the owner, or both are ultimately liable.

HOST: BROOKS: To clarify: a PTE tax in one state may be a tax expense on the financial statements, while in another state it may be a distribution. Is that correct?

WILL BILLOPS: That's correct. If the analysis shows a true entity-level liability with no owner liability, it becomes an entity-level tax and the entity reflects the income tax expense. If it's ultimately an owner-level tax, the owner treats it as a distribution.

HOST: BROOKS: We can't avoid discussing potential tax law changes planned for 2025 or 2026. Lisa, how should companies think about potential law changes in their financial statements?

LISA MACRI: Tax law changes impact several aspects of income tax reporting beyond changes in tax rates. Legislation can cause a non-taxpaying business to become taxpaying, as seen with Section 174 and net operating loss provisions from the TCJA.

LISA MACRI: Legislative changes can affect a company's need to assess a valuation allowance or to release one. Assessment goes beyond simple tax-rate changes and impacts reporting requirements.

HOST: BROOKS: Will, a practical question: if a C-Corporation tax rate decrease is enacted effective in 2025, can that impact 2024 financial statements as far as provisions?

WILL BILLOPS: A rate change effective in 2025 would be considered a subsequent event for 2024. If legislation were passed in early 2025 and known prior to issuance of the financial statements, disclosure for a subsequent event may be appropriate and requires company evaluation.

WILL BILLOPS: The date of enactment is the date you would reflect the change, and the true impact will most likely be presented in the 2025 financials for calendar-year companies. A subsequent event disclosure may be needed depending on timing.

HOST: BROOKS: The TCJA timing was close to year-end in prior cycles and affected financial statements beginning January 1. One planning note: if you are deferred tax asset heavy and expect a tax rate decrease, you should consider accelerating utilization of deferred tax assets to realize benefits at the current rate rather than a lower future rate.

WILL BILLOPS: Planning ahead is important to get the biggest benefit at a higher rate rather than a lower one if tax law changes occur.

HOST: BROOKS: Let's close with final comments. Lisa, any words of wisdom?

LISA MACRI: Plan ahead and learn as much as you can about upcoming changes and how they can impact your organization.

HOST: BROOKS: Will?

WILL BILLOPS: There is a lot of uncertainty on the horizon, but there is also certainty with some current changes. Companies should understand how current changes will impact their financial statements and tax positions to be prepared for future uncertainty.

HOST: BROOKS: Sarah?

SARAH MCGREGOR: Financial statements provide valuable information to users, and taxes play a greater role in those statements. The FASB's request for more detail is understandable, but companies may not always provide the resources, time, and support needed to handle complex disclosures well.

SARAH MCGREGOR: The breadth of potential changes is striking. International changes are deep, but we are also seeing wide-reaching impacts for multi-state and multinational entities. It does not take much for a company's supply chain or customers to extend beyond the home state, which affects tax reporting. With upcoming tax law changes likely, now is the right time for these conversations.

HOST: BROOKS: That concludes this discussion of reported income taxes and financial statements. A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, regarding specific tax issues or to discuss information from today's podcast.

HOST: BROOKS: Check the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics. This concludes today's podcast. Please like, share, and subscribe.

HOST: BROOKS: Thank you, Will. Thank you, Lisa. And thank you to our listeners for spending your time with us. Let's call it a day and go forth in peace.