# Prop. Treas. Reg. § 1.56A-2: Definition of applicable financial statement (AFS) and AFS priority rules. Proposed regulation, not in force. REG-112129-23, 89 FR 75062, published 2024-09-13 . Interprets 26 U.S.C. § 56A. 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(b) of the Code for determining the applicable financial statement (AFS) of a CAMT entity. Paragraph (b) of this section provides the definition of an AFS for purposes of the section 56A regulations. Paragraph (c) of this section provides a priority listing of financial statements for purposes of the AFS definition. Paragraph (d) of this section describes what it means for a financial statement to be certified. Paragraph (e) of this section provides rules for prioritizing a restated financial statement over an original financial statement. Paragraph (f) of this section provides rules for prioritizing an annual financial statement over a financial statement that covers a period of less than 12 months. Paragraph (g) of this section provides rules for determining whether a separate financial statement should be prioritized over a consolidated financial statement. Paragraph (h) of this section provides rules with respect to disregarded entities or branches. Paragraph (i) of this section provides examples illustrating the application of the rules in this section. Paragraph (j) of this section provides the applicability date of this section. (b) Definition of applicable financial statement. Subject to paragraphs (d) through (g) of this section, for purposes of the section 56A regulations, the term applicable financial statement (AFS) means a CAMT entity's financial statement listed in paragraph (c) of this section that has the highest priority, including priority within paragraphs (c)(1), (c)(1)(ii), (c)(2), (c)(2)(ii), (c)(3), (c)(3)(ii), and (c)(5) of this section. For example, a financial statement listed in paragraph (c)(1)(ii)(A) of this section has priority over a financial statement listed in paragraph (c)(1)(ii)(B) of this section. (c) General financial statement priority. For purposes of paragraph (b) of this section, the financial statements are, in order of descending priority— (1) GAAP statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with GAAP and is— (i) A financial statement included with Form 10-K (or any successor form), or annual statement to shareholders, filed with the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government or any Federal agency, other than the SEC or the Internal Revenue Service (IRS); (2) IFRS statements. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with IFRS and is— (i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS; (3) Financial statements prepared in accordance with other generally accepted accounting standards. An audited financial statement, other than a tax return, that is certified, within the meaning of paragraph (d) of this section, as being prepared in accordance with accepted accounting standards other than GAAP and IFRS that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions and is— (i) Filed by the CAMT entity with the SEC or with an agency of a foreign government that is equivalent to the SEC; (ii) Used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or (C) Any other substantial non-tax purpose; or (iii) Filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS; (4) Other government and regulatory statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), or (3) of this section, filed with the Federal Government or any Federal agency, a State government or State agency, a foreign government or foreign agency, or a self-regulatory organization, including, for example, a financial statement filed with a State agency that regulates insurance companies, the Financial Industry Regulatory Authority, or a comparable foreign self-regulatory organization; (5) Unaudited external statements. A financial statement, other than a tax return or a financial statement described in paragraph (c)(1), (2), (3), or (4) of this section, that is unaudited (or audited but not certified, within the meaning of paragraph (d) of this section) and prepared for an external non-tax purpose using— (i) GAAP; (ii) IFRS; or (iii) Any other accepted accounting standards that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions; or (6) Return. For a CAMT entity that is not a controlled foreign corporation, the Federal income tax return or information return filed with the IRS; or for a CAMT entity that is a controlled foreign corporation, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations (or any successor form). (d) Certified financial statement. A financial statement is certified for purposes of paragraph (c) of this section if it is— (1) Certified by an independent financial statement auditor to present fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards (that is, an unqualified or unmodified clean opinion); (2) Subject to a qualified or modified opinion by an independent financial statement auditor that the financial statement presents fairly the financial position and results of operations of a CAMT entity (or a financial statement group) in conformity with the relevant financial accounting standards, except for the effects of the matter to which the qualification or modification relates (that is, a qualified or modified except for opinion); or (3) Subject to an adverse opinion by an independent financial statement auditor, but only if the auditor discloses the amount of the disagreement with the statement. (e) Restatements. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued prior to the date that the CAMT entity files its original Federal income tax return for that taxable year, that restated AFS must be prioritized over the AFS being restated. If a CAMT entity restates FSI for a taxable year (or a portion of a taxable year) on a restated AFS that is issued on or after the date that the CAMT entity files an original Federal income tax return for that taxable year, see § 1.56A-17(d). (f) Annual and periodic financial statements. If a CAMT entity is required to file both annual financial statements and periodic financial statements covering less than a 12-month period with a government or government agency, the CAMT entity must prioritize the annual financial statements over the periodic financial statements in accordance with this section. (g) AFS priority rules for consolidated financial statements —(1) In general. Except as provided in paragraph (g)(2) of this section, if a CAMT entity's financial results are consolidated with the financial results of one or more other CAMT entities on one or more consolidated financial statements described in paragraphs (c)(1) through (5) of this section, the CAMT entity's AFS is the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section. However, except as provided in paragraph (g)(2) of this section, if the CAMT entity's financial results are also reported on one or more separate financial statements that are of equal or higher priority to that highest priority consolidated financial statement, then the CAMT entity's AFS is the separate financial statement with the highest priority under paragraph (c) of this section. (2) Exceptions to use of separate AFS —(i) Tax consolidated group member has only one consolidated financial statement that contains the financial results of all members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses that consolidated financial statement as the AFS, regardless of whether the member's financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (ii) Tax consolidated group member has more than one consolidated financial statement that contains the financial results of all members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the financial results of all members of a tax consolidated group, then a member of the tax consolidated group uses the consolidated financial statement with the highest priority under paragraphs (c)(1) through (5) of this section that contains the financial results of all members of the tax consolidated group, regardless of whether the member's financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains the financial results of some, but not all, members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (iii) Tax consolidated group member has only one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is only one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member's financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses that consolidated financial statement as its AFS, regardless of whether member's financial results also are reported on a separate financial statement that is of equal or higher priority to that consolidated financial statement. (iv) Tax consolidated group member has more than one consolidated financial statement that contains its financial results and the financial results of some, but not all, members of the tax consolidated group. Except as provided in paragraph (g)(2)(v) of this section, if a member of a tax consolidated group is not described in paragraph (g)(2)(i) or (ii) of this section and there is more than one consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains the member's financial results and the financial results of at least one other member of the tax consolidated group, but not all members of the tax consolidated group, then the member uses as its AFS the consolidated financial statement described in paragraphs (c)(1) through (5) of this section that contains its financial results and the financial results of the greatest number of members of the tax consolidated group (if there is more than one such consolidated financial statement, the member uses the one with the highest priority under paragraphs (c)(1) through (5) of this section), regardless of whether the member's financial results also are reported on— (A) A separate financial statement that is of equal or higher priority to that consolidated financial statement; or (B) A consolidated financial statement that contains its financial results and the financial results of fewer members of the tax consolidated group, and that is of equal or higher priority to that consolidated financial statement. (v) Members of an FPMG. If a CAMT entity is a member of an FPMG, and if the FPMG common parent prepares a consolidated financial statement for a financial statement group that includes the CAMT entity (FPMG consolidated AFS), then the CAMT entity uses the FPMG consolidated AFS as its AFS, regardless of whether the CAMT entity's financial results also are reported on a separate financial statement that is of equal or higher priority to the FPMG consolidated AFS. (h) Disregarded entities or branches. If the financial results of a disregarded entity or branch are reflected in the CAMT entity owner's AFS (as determined by applying the rules of this section), the disregarded entity or branch may not determine its own AFS under the rules of this section as if it were a separate CAMT entity (that is, the CAMT entity owner uses its AFS to determine its FSI and AFSI under the rules in § 1.56A-9). If the financial results of a disregarded entity or branch are not reflected in the CAMT entity owner's AFS (as determined by applying the rules of this section), the disregarded entity or branch determines its own AFS under the rules of this section as if it were a separate CAMT entity. See § 1.56A-9(b)(3) for rules for determining the FSI and AFSI of a CAMT entity that owns a disregarded entity or branch described in the preceding sentence. (i) Examples. The following examples illustrate the application of paragraphs (c) and (g) of this section. (1) Example 1: No substantial non-tax purpose— (i) Facts. FP is a foreign partnership (FP) that owns a controlling interest in X, a domestic corporation that is an applicable corporation. X is not a member of an FPMG under § 1.59-3 and is not a member of a tax consolidated group. FP prepares a consolidated AFS that includes X and other entities using IFRS. After the auditor provides an opinion certifying that the consolidated financial statements of FP present fairly the financial position and results of operations of FP and FP's investments in other entities in conformity with IFRS, X receives advice that its Federal income tax liability would be lower if it were to obtain a certified financial statement prepared in accordance with GAAP to use in determining its tentative minimum tax under section 55(b)(2)(A) of the Code. Solely to minimize Federal income taxes, X engages the auditor to provide a separate opinion certifying that X's financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP. Other than the consolidated AFS prepared by FP and X's audited GAAP financial statement, X does not prepare any other financial statement and X is not a member of any other consolidated financial statement. (ii) Analysis. X's audited GAAP financial statement is not a financial statement described in paragraph (c)(1)(ii) of this section because X's sole purpose for obtaining the statement was to minimize X's Federal income taxes, which is not a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X's AFS is the consolidated AFS prepared by FP because X is not a member of any other consolidated financial statement and X does not have a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP. (2) Example 2: Substantial non-tax purpose— (i) Facts. The facts are the same as in paragraph (i)(1) of this section ( Example 1 ), except that X is required by County G to obtain an audited GAAP financial statement that it provides to County G as part of its acquisition of a controlling interest in a public-private partnership for a significant transportation infrastructure project. X therefore engages the auditor to provide a separate opinion certifying that X's financial statements as converted from IFRS to GAAP present fairly the financial position and results of operations of X in conformity with GAAP. (ii) Analysis. X's audited GAAP financial statement is a financial statement described in paragraph (c)(1)(ii) of this section because it was prepared for a substantial non-tax purpose. Accordingly, under paragraph (g)(1) of this section, X's AFS is the audited GAAP financial statement as it is a separate financial statement that is of equal or higher priority to the consolidated AFS prepared by FP. (j) Applicability date. This section applies to taxable years ending after September 13, 2024.