SECTION 11. AFSI ADJUSTMENTS

TO PREVENT CERTAIN DUPLICATIONS AND OMISSIONS.

.01 Purpose . The Treasury Department and the IRS intend to propose rules in

forthcoming proposed regulations consistent with the interim guidance provided in this section 11, which provides Taxpayers with additional clarity in determining adjustments to prevent certain duplications and omissions of AFSI prior to forthcoming proposed regulations.

.02 Adjustments to prevent certain duplications and omissions .

(1) In general . In order to prevent duplications or omissions, AFSI must be adjusted for the items described in this section 11.02 and for such other items as required or permitted in regulations or in other guidance. See section 13.04(2) of this notice for modifications to AFSI to prevent duplications that apply solely for purposes of § 59(k).

(2) Change in financial accounting principle .

(a) In general . AFSI must be adjusted to take into account any cumulative adjustment to the retained earnings of the Taxpayer on its AFS if such adjustment results from a change in financial accounting principle (Accounting Principle Change Adjustment). Except as otherwise provided in regulations or in other guidance, such adjustment must be taken into account in the Taxpayer’s AFSI during the period provided in section 11.02(2) (b) of this notice (Adjustment Spread Period Rule). An Accounting Principle Change Adjustment may be subject to further adjustment if it relates to FSI items for which other AFSI adjustments under § 56A, regulations, or other guidance apply (Net Accounting Principle Change Adjustment). For example, to the extent the Accounting Principle Change Adjustment includes a Federal income tax component, § 56A(c)(5) may apply. In such case, the Adjustment Spread Period Rule applies to the Net Accounting Principle Change Adjustment.

(b) Adjustment Spread Period Rule . (i) Duplications . In the case of an Accounting Principle Change Adjustment or Net Accounting Principle Change Adjustment, as applicable, that is necessary to prevent the duplication of an item of income, expense, gain, or loss for AFSI purposes, such adjustment must be taken into account in AFSI ratably over the four-taxableyear period beginning with the taxable year for which the change in financial

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accounting principle is implemented in the Taxpayer’s AFS. However, if the Taxpayer is able to demonstrate that the duplication is reasonably anticipated to occur over a different period, then the corresponding Accounting Principle Change Adjustment or Net Accounting Principle Change Adjustment, as applicable, may be taken into account in AFSI ratably over such period (not to exceed fifteen years) beginning with the taxable year for which the change in financial accounting principle is implemented in the Taxpayer’s AFS.

(ii) Omissions . In the case of an Accounting Principle Change Adjustment or Net Accounting Principle Change Adjustment, as applicable, that is (A) necessary to prevent the omission of an item of income, expense, gain, or loss for AFSI purposes, and (B) results in an increase to AFSI, such adjustment must be taken into account in AFSI ratably over the four-taxable-year period beginning with the taxable year for which the change in financial accounting principle is implemented in the Taxpayer’s AFS. In the case of an Accounting Principle Change Adjustment or Net Accounting Principle Change Adjustment, as applicable, that is (A) necessary to prevent the omission of an item of income, expense, gain, or loss for AFSI purposes, and (B) results in a decrease to AFSI, such adjustment must be taken into account in AFSI in full in the taxable year for which the change in financial accounting principle is implemented in the Taxpayer’s AFS.

(c) Acceleration of financial account- ing principle adjustment . If, in any taxable year, a Taxpayer ceases to engage in the trade or business that is the subject of an Accounting Principle Change Adjustment or Net Accounting Principle Change Adjustment, as applicable, the Taxpayer must take into account in AFSI for such taxable year any portion of the adjustment not taken into account in AFSI for a previous taxable year.

(d) Use of different priority AFSs in consecutive taxable years . If the priority of a Taxpayer’s AFS (as determined under the rules of section 4.02 of this notice) for the current taxable year is different than the priority of the Taxpayer’s AFS for the preceding taxable year, the Taxpayer will be treated as having implemented a change

in financial accounting principle and must adjust AFSI to the extent required under the rules of section 11.02(2) of this notice.

(3) Restatement of a prior year’s AFS . (a) In general . Except as provided in section 11.02(3)(b) of this notice, if a Taxpayer restates an AFS and, as a result, the Taxpayer’s FSI for a taxable year is restated after the Taxpayer filed its original Federal income tax return for such taxable year, the Taxpayer must account for the restatement by adjusting its AFSI for the first taxable year after such taxable year for which the Taxpayer has not filed an original return as of the restatement date. The restatement adjustment must take into account the cumulative effect of the restatement on FSI, including any restatement of the beginning balance of retained earnings for the period being restated. The restatement adjustment described in the preceding sentence may be subject to further adjustment if an FSI item being restated is subject to adjustment under § 56A, regulations, or other guidance. For example, to the extent such restatement adjustment includes a Federal tax component, § 56A(c)(5) may apply. See section 4.02(3) of this notice for what constitutes a restatement and for rules relating to the restatement of an AFS prior to the date the Taxpayer’s return for the taxable year is filed.

(b) Exception for amended return . If, after restating an AFS for a taxable year, a Taxpayer files an amended return or an administrative adjustment request under § 6227 (AAR), as applicable, for such taxable year to adjust regular taxable income as a result of the restatement, the Taxpayer must use the Restated AFS for purposes of determining AFSI on the amended return or AAR, as applicable, rather than make the adjustment set forth in section 11.02(3)(a) of this notice. (c) Reconciliation of retained earnings in AFS . The Taxpayer will be deemed to have restated its AFS for the preceding taxable year described in section 11.02(3) (c)(i) of this notice and section 11.02(3) (a) or (b) of this notice, as applicable, will apply, if- (i) The beginning balance of retained earnings on the Taxpayer’s AFS for the current taxable year is adjusted to be different than the ending balance of retained earnings on the Taxpayer’s AFS for the

preceding taxable year (for example, as a result of a prior period adjustment),

(ii) Such difference is attributable to items that would otherwise be reflected in the Taxpayer’s FSI under the relevant accounting standards, and

(iii) The Taxpayer is not otherwise subject to the adjustment rules in sections 11.02(2) or (3)(a) or (b) of this notice. (d) Example . The following example illustrates the rule set forth in section 11.02(3)(a) of this notice. (i) Facts . X is a calendar year Taxpayer and issues its AFS on a calendar year basis. On September 15, 2024, X files its Federal income tax return for taxable year 2023 and reports FSI of $1.580 billion, which is the FSI set forth on X’s Original AFS for 2023, and AFSI of $2 billion (FSI of $1.580 billion adjusted to add back $420 million of Federal income tax expense under § 56A(c)(5)). On November 1, 2024, X issues a Restated AFS for 2023 that reflects an FSI of $2.370 billion (which includes a reduction for Federal income tax expense of $630 million). The Restated AFS also includes an adjustment to increase the 2023 beginning balance of retained earnings by $70 million ($100 million of income less $30 million of 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. X is not subject to any AFSI adjustments other than the AFSI adjustment under § 56A(c)(5).

(ii) Analysis . X has restated its AFS and FSI for 2023 after having filed its original 2023 Federal income tax return. Pursuant to section 11.02(3)(a) of this notice, X must account for the restatement by adjusting its AFSI for taxable year 2024. On X’s 2024 Federal income tax return, X will increase AFSI by $1.1 billion 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 $1.1 billion 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 (2023). The $1.1 billion comprises $790 million (the difference between FSI reported on the Restated AFS of $2.370 billion and the FSI reported on the Original AFS of $1.580 billion), plus $210 million (the difference between Federal income tax expense reported on the Restated AFS of $630 million and the Federal income tax expense reported on the Original AFS of $420 million, which is required to be added back under § 56A(c)(5) in determining AFSI), plus $100 million (the adjustment to the 2023 beginning balance of retained earnings reported on the Restated AFS for 2023 of $70 million increased under § 56A(c)(5) by the $30 million of related Federal income tax expense).

(4) Adjustment for amounts disclosed in an auditor’s opinion . AFSI must be adjusted to take into account amounts disclosed in an auditor’s opinion described in section 4.02(2)(b) or (c) of this notice to the extent such amounts would have increased FSI had they been reported in

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the Taxpayer’s AFS. No AFSI adjustment is required to the extent the disclosed amounts were included in FSI for a prior year. Moreover, if FSI for a subsequent year includes amounts included in AFSI pursuant to an adjustment made under this paragraph, AFSI for the subsequent year must be adjusted to prevent any duplication of income.

(5) No adjustment for timing differ- ences . Differences between when an item is taken into account in FSI and when that item is taken into account for Regular Tax purposes do not give rise to duplications or omissions within the meaning of § 56A(c)(15)(A) or section 11.02 of this notice, even if the timing difference originated before the effective date of the CAMT and reversed after such effective date. Thus, for example, the inclusion of an item in FSI prior to the effective date of the CAMT and the inclusion of the item in regular taxable income after the effective date of the CAMT does not result in a duplication or omission.