Navigating Financial Statement Reporting and Disclosures

(00:01) [Music] welcome to the Cherry Bekaert tax beat a conversation about tax that [Music] matters welcome to this edition of the Cherry Bekaert tax beat podcast today we are talking about financial statement reporting rules and required disclosures of income tax information not our usual tax topic for sure but reporting income tax accounts an activity in a company's financial statements is a very important part of understanding a company's financial position and results and The accting Regulators continue to increase

(00:41) the details and disclosures regarding taxes in the financial statements of course what else would they'd be doing so joining in today's conversation is Will bips partner and leader of our tax provision Services team and Lisa Macker director with our tax provision service team so will how's it going today it's going pretty well Brooks this is obviously an exciting time for us with a lot of legislative change on the horizon both on the tax side for tax law changes and the codification for the implementation of

(01:14) 20239 I'm sitting in the Nashville office and looking forward to the discussion today thank you for having us all right and Lisa how are you doing I'm doing well I'm happy to be here and be a part of this discussion I'm sitting in from Atlanta Jordan right well I'm sitting in Richmond Virginia today and it is particularly baly relatively speaking we I mean I think we're 50 degrees in Sunny which is uh about 40 degrees warmer than it's been the last couple of weeks and joining me my partner in crime as always

(01:50) Miss Sarah McGregor how you doing Sarah how's life treating you uh life is good and here I think this is the first 24hour period where we've been above freezing the whole time uh it's several weeks so I hope that means that the worst part of winter is over um and we're rolling right into our super busy uh tax season period so lots of exciting things this time of year I'm talking to folks about finishing their 23 returns about their 24 returns about planning for 25 and everybody wants to know what's going to happen in 26 that's

(02:24) way too many tax years so we're g to get this going yes yes it is a uh it is a weird lining up of the constellations where we got so many taxers being talked about at one time all right so on to today's topic uh just a little background the fby sets the rules for information that is included in audited financial statements for a number of years the fby has considered challenge uh has considered changes rather to its rules to require more information about income taxes and financial statements last year ASU 20239 was introduced uh it

(03:05) will require companies to break out more tax information into smaller pieces by jurisdiction um this is particularly important and onerous for companies with significant operations in multiple International locations uh but that's not all the fun we're going to have ASU 20239 is not the only tax reporting challenge companies will work through this year all right all right so will let's take it from the top um uh let's hear the big picture on what is ASC 740 and why is it important for financial reporting thank you Brooks ASC 740 is

(03:45) very important because because it gives the financial statement user a snapshot of the tax position of the company it not only breaks out the components of the company's current income tax position but it also reflects taxes are benefits that will be realized in the future that can be from the reversal of deferred tax assets and liabilities of future periods a lot of financial statement users also focus on different elements that are driving the company's effective tax rate ASC 740 provides detailed information about items

(04:18) impacting the total income tax expense in the income statement as well as ultimately within the income tax payable So Lisa that's a lot to cover and it's more than a tax return uh what are some of the common challenges that companies face in thinking about ASC 740 and how to apply it to their financial statements yeah so common challenges include implementing and adopting constant changes to tax legislation especially in an never changing tax landscape and then you couple that with meeting FB reporting requirements so um some challenges

(04:55) revolve around the reporting requirements of complex entities structures such as multinationals multi-state crossb transactions and in addition to accurately reflecting and Reporting the impact of transactions in the financial statements um and then you know we often see companies not leveraging appropriate technology that would assist in meeting their financial reporting requirements so finding the right tools and using them given the compressed time frame to try to get all of this done I can see that a tough challenge so will about a

(05:34) year ago I think Brooks mentioned it we were talking with you and Brian Diller direct head of uh International Tax Services about ASU companies are required to adopt 2026 private entities so now now instead of being out on the horizon it's here ASU 20239 is a fundamental change to Prior reporting requirements 20239 creates a road map for income taxes producing detailed financial statement disclosures it's an expansion of more transparent reporting of income taxes presented in the financials the pronoun the pronouncement itself creates strict

(06:29) parameters for buckets for the effective tax rate disclosures and outlays when and how additional details should be included for the required buckets there are new requirements such as income taxes paid disclosures that need to be included the most challenging aspect of 22309 revolves around the disaggregation of certain categories that are now required to be disclosed within the financials this can be particularly challenging for multi-state and Multinational entities that are taxed in multiple jurisdictions

(07:00) the disclosure of income taxes across multiple jurisdictions becomes more transparent and it's a lot more information that's required to get there now yeah well anytime you use the word disaggregation it just kind of feels uncomfortable doesn't it but um but anyway we got 20239 has brought changes also to the rate reconcil rate rate reconciliation schedule requiring categories that meet a certain threshold to be further dis aggregated like I love it more disaggregation so Lisa how have you and your team worked with companies on the

(07:36) rate front yeah so first and foremost we've communicated these changes with our clients that are public companies and that are required to adopt ASU 20239 and 2025 especially with them you know communicating the understanding of what categories are required to be disaggregated and what that can mean for them and this kind of upgraded reporting process um we've also kind of assessed with our clients those that might want to early adopt this pronouncement and then we've begun measures for implementing the new reporting process such as leveraging

(08:14) technology that will assist us with this disaggregation of new categories yesik um yeah I'll just say for a lot of private companies this could sound scary so will what should CFOs and tax directors of multinational companies be thinking about now uh what should their first step of action be thank you Brooks th this is the time everybody needs to be paying attention a CFO should be ensuring that folks in their organization understand the additional information that's going to be needed for the enhanced reporting

(08:52) requirements and a CFO should determine the best way to go about gathering this information internally CFOs should be familiar with the categories that require disaggregation and whether their company meets the enhanced reporting based on the thresholds within 20239 this is all top of mind and something that everybody ought to be aware that this is a lot of additional information we've got to go data mine to get to the answer that we're going to have to have for disclosure requirements so enough about all this

(09:23) disaggregation stuff that sounds hard let's talk about some good news for companies that happened this year um that is the transferability of energy credits I think I've heard from a lot of C corporations wanting to acquire these credits to pay their taxes essentially at a discount so Lisa what are you seeing and how does this fit into financial reporting of taxes well we've certainly seen a lot of companies take advantage of this new legislation like not only in 2024 but in 2025 from both the buying of transferable energy credits as well as

(10:00) the the sell side of these credits and so we've really been leveraging the guidance within ASC 740 of how to account for both of the buy side and sell side of these credits and really the key is to understand the nature of the credit and the nature of the transaction um and how Energy Credit transactions will impact each component of the income tax disclosure not only from you know a current income tax perspective but deferred balance bces and deferred taxes as well okay U let's pivot to another area uh Acquisitions Andor dispositions So

(10:43) Lisa what nuances or what are the uh things that CFOs should be or should be looking at in that area as it relates to our financial reporting so when it comes to transactions um you should definitely understand there's different ways to structure a transaction to achieve an overall result and these different kind of structures may have different tax consequences um and other consequences from an income tax and financial reporting perspective for example the way a transaction is structured could have unique requirements when it comes

(11:21) to purchase accounting the reporting of defer tax assets and liabilities um it's also important to understand the advantages and disadvantages of different deal structures and the way transactions need to be reported wow okay so now we're gonna talk about something that I do find exciting was which is passed through entities and pass through entity tax rules uh and I just say that as a partner in a partnership they uh bring great uh tax benefits so I am uh but they also bring tremendous complexity and every state does it differently very

(12:04) differently but um but as a general rule pass through entities do not have income tax provisions and pass through entities we're talking about Partnerships or maybe s corporations so how does the prevalence of pass through entity tax elections impact financial reporting will the new pass through entity tax regime has really changed the landscape the there's been a lot of thought leadership that's been published the ascpa published some examples and guidelines to follow related to this ultimately the treatment will come down

(12:39) to determining when the entity Bears the burden of the liability whether that falls upon the p through entity itself or another party will determine whether or not an entity actually has an income tax that it needs to be presented in the financial statements these pte elections need to be analyzed in income taxes made need to be addressed for financial reporting purposes it's a jurisdiction by jurisdiction analysis that needs to be completed for the jurisdictions and entities operating because you've got to

(13:10) go to whether it is the entity or the owner or both that are ultimately liable for that tax liability and and I guess just to clarify in my own mind what you're saying that pte tax and one state may be a tax expense on the financial statements but a pte tax and another state may just be a distribution on the financial statements do I have that more or less correct that's exactly like exactly right Brooks so when you're doing the analysis of the jurisdiction by jurisdiction liability if it is a true entity level liability and there is

(13:46) no actual liability of the owners then it becomes an entity level tax in that situation that entity would have to reflect the income tax expense and impact of that pte election on the entity itself whereas if it was an ultimately an own owner level tax then the owner would treat that as a distribution cool so Lisa we can't uh avoid not talking about the potential for tax law changes that can are planned to occur here in 2025 maybe taking effect in 25 maybe taking effect in 2026 so what can you tell us about that

(14:29) and particularly how do companies think about this with taxes in their financial statements yeah so the important thing to remember is that tax law changes impact several aspects of income tax reporting not just from an increase or a decrease in a tax rate but we've also seen how tax legislation can cause a non-t taxpaying business become taxpaying I mean we've seen this with Section 174 for example as well as the net operating loss Provisions from the tcja and another important thing to think about is these legislative changes

(15:10) could have an impact on a company's need for the assessment of evaluation allowance or the release of evaluation allowance so it goes a lot further in assessing you know reporting requirements Beyond just the simple change in tax rate all right will I ask you kind of a uh again a kind of a simplistic money question here if we have a rate decrease a C Corp tax rate decrease which president Trump has said he wants and it's effective in 2025 can that have an impact on 2024 financial statements as far as your Provisions so this would be considered a

(15:54) subsequent event for 2025 if legislation were to be passed in early 2025 that was known prior to the actual issuance of the financial statements a disclosure for a subsequent event may be appropriate something that a company will have to evaluate on how to address this all legislative changes will be you know enact is the date of enactment is when you will be reflecting this is most likely going to be presented with the true impact in the 2025 financials and this is obviously for calendar years not fiscal years right but a subsequent

(16:28) event may need to be disclosed related to this got it thank you last last time with tcja it happened so close to the end of the year and became aective the first day of the next tax year we didn't have that but we certainly had to deal with the change in tax rates affecting financial statements uh beginning January 1 of 18 so one item to note on this too Brooks and Sarah is that it's important to be planning ahead if we know that we are deferred tax asset heavy and we're going to have a tax rate lowering event then we should be trying

(17:01) to accelerate those deferred tax assets into periods now this is why it's so important and why we're talking to clients now about utilizing deferred tax assets to get a bigger bang for your buck at a 21% rate than you would get at a 15% rate if a tax law change comes into play for the rates so it's very important if you have questions or concerns reach out to our team we're happy to help yeah yeah uh and CFOs can get EX exced about a 6% effective rate change whatever for sure all right let's move on to some final comments on

(17:37) today's session so we'll start with you Lisa what words of wisdom would you like to leave with I'm a big Contender of planning ahead and you know learning as much as you can about what's to come and what's out there and how that could impact you thank you and will there's a lot of uncertainty on the horizon right now we do have certainty with some of these changes that have taken place so I think it's really important for companies to get on board and understand what these current changes will impact their financial

(18:13) statements and their tax position just to be prepared for what uncertainty may lay in the future and Sarah well as always the financial statements um carry information to to users that is very valuable and as the fby has seen and as we see taxes play a greater and greater role in those financial statements so I'm not surprised that they're asking for more detail more information but uh that asking for more sudden doesn't always make it through to companies to provide the resources the time the support to make sure that these uh complex

(18:55) disclosures are handled well in their financial reporting um for myself I'm struck at the breadth of the potential changes I know that I mean we really harped on a year ago the depth of the changes when you're in the International Space but this is really showing bread if you're multi-state you're multinational and I mean it's not that hard to become one of those two and you know they are certainly business are truly solo jurisdictional but uh it doesn't take too much to get your supply chain or your customers outside of your

(19:32) home state these days uh the way all the tax SS are working there and with all the upcoming change in the tax law I don't um I know we don't know what all those changes are going to be but I I'm willing to bet we are going to have some changes so it just seems like the time is right for these type of conversations for sure okay that's a wrap on this discussion of reporting income taxes and financial statements thank you for listening in a quick claimer that we are not providing tax advice on this podcast please consult with your Tax Advisor

(20:04) hopefully at Cherry Bekaert with your specific tax issues or to discuss information from today's podcast check out 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 thank you will thank you Lisa and thank you our listeners for spending your time with us we truly appreciate it just call it a day and go forth in peace [Music]