Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview. This section provides rules under section 56A(c)(15)(A) of the Code regarding AFSI adjustments to prevent the duplication or omission of income, expense, gain, or loss. Paragraph (b) of this section provides general rules for adjusting AFSI to prevent such duplications or omissions. Paragraph (c) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from a change in accounting principle. Paragraph (d) of this section provides rules for adjusting AFSI to prevent duplications or omissions that arise from an AFS restatement. Paragraph (e) of this section provides rules for adjusting AFSI to prevent the omission of amounts disclosed in an auditor's opinion. Paragraph (f) of this section provides rules on timing differences that do not give rise to a duplication or omission. Paragraph (g) of this section provides the applicability date of this section.
(b) In general. To prevent duplications or omissions of items of income, expense, gain, or loss, AFSI is adjusted for the items described in paragraphs (c) through (e) of this section and for such other items as required or permitted in other sections of the section 56A regulations (for example, § 1.56A-4(c)(1)). See § 1.59-2 for modifications to AFSI to prevent duplications or omissions that apply solely for purposes of section 59(k) of the Code.
(c) Change in accounting principle— (1) In general. If a CAMT entity implements a change in accounting principle in its AFS, or if the CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section, AFSI of the CAMT entity is adjusted to include the accounting principle change amount (as determined under paragraph (c)(2) of this section) for the taxable year(s) provided in paragraphs (c)(3) and (4) of this section.
(2) Accounting principle change amount —(i) In general. If a CAMT entity implements a change in accounting principle in its AFS for a taxable year, the accounting principle change amount is equal to the amount of the net cumulative adjustment to the CAMT entity's beginning retained earnings for the taxable year that results from the change in accounting principle, adjusted to—
(A) Disregard any portion of the cumulative retained earnings adjustment attributable to taxable years beginning on or before December 31, 2019; and
(B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the cumulative retained earnings adjustment is attributable to FSI items to which those AFSI adjustments apply.
(ii) Change in AFS under paragraph (c)(5) of this section. If a CAMT entity is treated as implementing a change in accounting principle under paragraph (c)(5) of this section for a taxable year, the accounting principle change amount is equal to the difference between the CAMT entity's beginning retained earnings reflected in the CAMT entity's current AFS as of the beginning of the taxable year and the CAMT entity's ending retained earnings reflected in the CAMT entity's former AFS as of the end of the immediately preceding taxable year (retained earnings difference), adjusted to—
(A) Disregard any portion of the retained earnings difference attributable to taxable years beginning on or before December 31, 2019; and
(B) Reflect the AFSI adjustments provided in other sections of the section 56A regulations to the extent the retained earnings difference is attributable to FSI items to which those AFSI adjustments apply.
(3) Adjustment spread period rule —(i) Duplications— (A) General rule. Except as provided in paragraph (c)(3)(i)(B) of this section, if an accounting principle change amount prevents a net duplication for AFSI purposes, the amount is included in the CAMT entity's AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.
(B) Duplication over different period. If the CAMT entity is able to demonstrate that the net duplication described in paragraph (c)(3)(i)(A) of this section is reasonably anticipated to occur over a different period (not to exceed fifteen taxable years), then the accounting principle change amount may be included in the CAMT entity's AFSI ratably over such period, beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.
(ii) Omissions— (A) Increase to AFI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in an increase to AFSI, the amount is included in the CAMT entity's AFSI ratably over four taxable years beginning with the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.
(B) Decrease to AFSI. If an accounting principle change amount prevents a net omission for AFSI purposes and results in a decrease to AFSI, the amount is included in the CAMT entity's AFSI in full in the taxable year for which the change in accounting principle is implemented in the CAMT entity's AFS.
(iii) Short periods. For purposes of paragraphs (c)(3)(i) and (ii) of this section, if any taxable year during the relevant spread period is a short taxable year, the CAMT entity takes the accounting principle change amount into account as if that short taxable year were a full 12-month taxable year.
(4) Acceleration of accounting principle change amount. If, in any taxable year, a CAMT entity ceases to engage in a trade or business to which an accounting principle change amount relates, the CAMT entity includes in AFSI for such taxable year any portion of such amount not included in AFSI for a previous taxable year.
(5) Use of different priority AFSs in consecutive taxable years. If the priority of a CAMT entity's AFS (as determined under § 1.56A-2(c)) for the taxable year is different than the priority of the CAMT entity's AFS for the immediately preceding taxable year, the CAMT entity is treated as having implemented a change in accounting principle for the taxable year and adjusts AFSI to the extent required under this paragraph (c).
(6) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, the adjustments to retained earnings due to the change in accounting principle are shown on a pre-tax basis.
(i) Example 1: Adjustment spread period: duplicated income spread over 2 years —(A) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. Under the accounting standards that X uses to prepare its AFS, X reports income from contracts under an acceleration method. The applicable regulatory body that issues the accounting standards that X uses to prepare its AFS changed the accounting standards to require income from contracts accounted for under an acceleration method to be accounted for under an end-of-contract deferral method, effective for financial statements issued for financial accounting periods beginning after December 31, 2023. This change in accounting standards constitutes a change in accounting principle. On January 1, 2024, X has outstanding contracts that are subject to this change in accounting principle (Affected Contracts), and the term of the longest Affected Contract ends in 2025. In X's 2024 AFS, X makes a $150x negative cumulative adjustment to its opening retained earnings for 2024 to reverse the income X previously reflected in its FSI after 2019 and prior to 2024 with respect to the Affected Contracts. Pursuant to the new accounting principle, X reflects the duplicated income from the Affected Contracts in FSI for 2024 and 2025.
(B) Analysis. Under paragraph (c)(1) of this section, X is required to adjust AFSI by the accounting principle change amount (the $150x negative cumulative adjustment) for the taxable years provided in paragraph (c)(3) of this section. Because the accounting principle change amount prevents a duplication of income, under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI in 2024 and 2025, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over 2024 and 2025 ($150x/2 years = $75x per year).
(ii) Example 2: Adjustment spread period: duplicated income spread over 10 years —(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section ( Example 1 ), except that the term of the longest Affected Contract ends in 2033.
(B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over four taxable years beginning with the 2024 taxable year ($150x/4 years = $37.5x year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over the 10-year period from 2024 through 2033, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 10-year period from the 2024 taxable year through the 2033 taxable year ($150x/10 years = $15x per year).
(iii) Example 3: Adjustment spread period: duplications expected over twenty-year period —(A) Facts. The facts are the same as in paragraph (c)(6)(i)(A) of this section ( Example 1 ), except that the term of the longest Affected Contract ends in 2043.
(B) Analysis. Under paragraph (c)(3)(i)(A) of this section, X takes the negative $150x accounting principle change amount into account in AFSI ratably over the four-taxable-year period beginning with the 2024 taxable year ($150x/4 years = $37.5x per year). Alternatively, because X is able to demonstrate that the duplicated income is reasonably expected to be included in FSI over a period in excess of 15 taxable years, under paragraph (c)(3)(i)(B) of this section X may choose to take the negative $150x accounting principle change amount into account in AFSI ratably over the 15-year period from the 2024 taxable year through the 2038 taxable year ($150x/15 years = $10x per year).
(d) Restatement of a prior year's AFS —(1) In general— (i) Adjustments to AFSI. Except as provided in paragraph (d)(2) of this section, if a CAMT entity issues a restated AFS and, as a result, the CAMT entity's FSI for a taxable year beginning after December 31, 2019, is restated on or after the date the CAMT entity filed its original Federal income tax return for such taxable year (restatement year), the CAMT entity accounts for the restatement by adjusting its AFSI for the taxable year in which the restated AFS is issued (AFSI restatement adjustment). Subject to paragraph (d)(1)(ii) of this section, the AFSI restatement adjustment takes into account the cumulative effect of the restatement on the CAMT entity's FSI for the restatement year, including any restatement of the CAMT entity's beginning retained earnings for the restatement year (but only to the extent the retained earnings restatement is attributable to taxable years beginning after December 31, 2019). See § 1.56A-2(e) for rules relating to the issuance of a restated AFS prior to the date the CAMT entity's return for the taxable year is filed.
(ii) Further adjustments to AFSI. The AFSI restatement adjustment described in paragraph (d)(1)(i) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the AFSI restatement adjustment includes a Federal income tax component, § 1.56A-8 applies to disregard that component.
(2) Exception for amended return. If, after issuing a restated AFS for a taxable year, a CAMT entity files an amended return or an administrative adjustment request under section 6227 of the Code (AAR), as applicable, for the taxable year to adjust taxable income as a result of the restatement, the CAMT entity must use the restated AFS for purposes of determining AFSI on the amended return or AAR, as applicable, rather than make the AFSI restatement adjustment under paragraph (d)(1) of this section.
(3) Reconciliation of retained earnings in AFS. A CAMT entity is deemed to have issued a restated AFS for a preceding taxable year described in paragraph (d)(3)(i) of this section, and applies paragraph (d)(1) or (2) of this section, as applicable, if—
(i) The beginning retained earnings reflected in the CAMT entity's AFS for the current taxable year is adjusted to be different than the ending retained earnings reflected in the CAMT entity's AFS for the preceding taxable year (for example, as a result of a prior period adjustment);
(ii) The difference described in paragraph (d)(3)(i) of this section is attributable to items that otherwise would be reflected in the CAMT entity's FSI under the relevant accounting standards used to prepare the CAMT entity's AFS; and
(iii) The CAMT entity is not otherwise subject to paragraph (c) or (d)(1) or (2) of this section.
(4) Example. The following example illustrates the application of paragraph (d)(1) of this section.
(i) Facts. X is a CAMT entity that uses the calendar year as its taxable year and has a calendar-year financial accounting period. On September 15, 2024, X files its Federal income tax return for taxable year 2023 and reports FSI of $1,580x, which is the FSI set forth on X's original AFS for 2023, and AFSI of $2,000x (FSI of $1,580x adjusted to disregard $420x of Federal income tax expense under § 1.56A-8). On November 1, 2024, X issues a restated AFS for 2023 that reflects FSI of $2,370x (which includes a reduction for Federal income tax expense of $630x). The restated AFS also includes an adjustment to increase the 2023 beginning balance of retained earnings by $79x ($100x income−$21x Federal income tax expense) related to income from a prior period that was underreported. X is not amending its taxable year 2023 Federal income tax return to adjust taxable income for such year. X is not subject to any AFSI adjustments other than the AFSI adjustment under § 1.56A-8.
(ii) Analysis. X has restated its FSI for 2023 in a restated AFS issued after X filed its original 2023 Federal income tax return. Pursuant to paragraph (d)(1) of this section, X accounts for the restatement by adjusting its AFSI for taxable year 2024, the taxable year in which the restated AFS for 2023 is issued. On X's 2024 Federal income tax return, X will increase AFSI by $1,100x for taxable year 2024, which is the first taxable year for which X has not filed an original return as of the November 1, 2024, restatement date. The $1,100x adjustment represents the cumulative effect of the restatement on FSI, including any restatement of the beginning balance of retained earnings for the period being restated, or 2023. The $1,100x consists of $790x ($2,370x FSI reported on the restated AFS−$1,580x FSI reported on the original AFS), plus $210x ($630x Federal income tax expense reported on the restated AFS−$420x Federal income tax expense reported on the original AFS, which is required to be disregarded under section § 1.56A-8 in determining AFSI), plus $100x ($79x net adjustment to the 2023 beginning balance of retained earnings reported on the restated AFS for 2023 + $21x disregarded Federal income tax expense (under § 1.56A-8)).
(e) Adjustment for amounts disclosed in an auditor's opinion —(1) In general. AFSI is adjusted to include amounts disclosed in an auditor's opinion described in § 1.56A-2(d)(2) and (3) to the extent such amounts would have increased FSI for the taxable year to which the auditor's opinion relates had the amounts been reflected in the CAMT entity's AFS for such taxable year (auditor increase to FSI). No AFSI adjustment is required to the extent the auditor increases to FSI were included in FSI for a prior taxable year. Moreover, if FSI for a subsequent taxable year includes amounts included in AFSI pursuant to an adjustment under this paragraph (e), AFSI for the subsequent taxable year is adjusted to prevent any duplication of income.
(2) Further adjustments to AFSI. The auditor increase to FSI described in paragraph (e)(1) of this section is subject to further adjustment if it relates to one or more FSI items to which AFSI adjustments provided in other sections of the section 56A regulations apply. For example, to the extent the auditor increase to FSI includes a Federal income tax component, § 1.56A-8 applies to disregard that component.
(f) No adjustment for timing differences. No adjustment to AFSI is permitted to account for differences between the taxable year in which an item is taken into account in FSI and the taxable year in which that item is taken into account for regular tax purposes, even if the timing difference for that item originates in a taxable year that begins prior to January 1, 2023, and reverses in a taxable year that begins on or after January 1, 2023.
(g) Applicability date. This section applies to taxable years ending after September 13, 2024.