SECTION 4. DETERMINING A — Internal Revenue Bulletin 2023-40

TAXPAYER’S AFS

.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 4, which provides Taxpayers with additional clarity in determining their AFS prior to forthcoming proposed regulations.

.02 Definition of Applicable Financial Statement (AFS) . Subject to the additional

rules in section 4.02(2) through (5) of this notice, for purposes of §§ 56A and 59, the terms Applicable Financial Statement and AFS mean the Taxpayer’s financial statement listed in section 4.02(1) of this notice that has the highest priority, including priority within sections 4.02(1)(a), (a) (ii), (b), (b)(ii), and (d) of this notice.

(1) General financial statement prior- ity . The financial statements are, in order of descending priority:

(a) GAAP statements . A financial statement that is certified, within the meaning of section 4.02(2) of this notice, as being prepared in accordance with United States generally accepted accounting principles (GAAP) and is:

(i) A Form 10-K (or successor form), or annual statement to shareholders, filed with the United States Securities and Exchange Commission (SEC);

(ii) An audited financial statement of the Taxpayer that is used for:

(A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or

(iii) A financial statement, other than a tax return, filed with the Federal Government or any Federal agency, other than the SEC or the IRS;

(b) IFRS statements . A financial statement that is certified, within the meaning of section 4.02(2) of this notice, as being prepared in accordance with international financial reporting standards (IFRS) and is:

(i) Filed by the Taxpayer with an agency of a foreign government that is equivalent to the SEC, and has financial reporting standards not less stringent than the standards required by the SEC;

(ii) An audited financial statement of the Taxpayer that is used for:

(A) Credit purposes; (B) Reporting to shareholders, partners, or other proprietors, or to beneficiaries; or

(iii) A financial statement, other than a tax return, filed with the Federal Government, a Federal agency, a foreign government, or an agency of a foreign government, other than the SEC, the IRS,

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or an agency that is equivalent to the SEC or the IRS;

(c) Other government and regulatory statements . A financial statement, other than a tax return, 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, or the Financial Industry Regulatory Authority, or a comparable foreign self-regulatory organization;

(d) Unaudited external statements . A financial statement, other than a tax return or a financial statement described in section 4.02(1)(a)-(c) of this notice, that is unaudited (or audited but not certified, within the meaning of section 4.02(2) of this notice), prepared for an external nontax purpose, and prepared 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

(e) The Taxpayer’s Federal income tax return or information return filed with the IRS.

(2) Certified financial statement . A financial statement is certified for purposes of section 4.02(1) of this notice if it is:

(a) Certified by an independent financial statement auditor to present fairly the financial position and results of operations of a Taxpayer (or group of Taxpayers) in conformity with the relevant financial accounting standards (an unqualified or unmodified “clean” opinion);

(b) Subject to a qualified or modified opinion by an independent financial statement auditor that such financial statement presents fairly the financial position and results of operations of a Taxpayer (or group of Taxpayers) in conformity with the relevant financial accounting standards, except for the effects of the matter to which the qualification or modification relates (a qualified or modified “except for” opinion); or

but only if the auditor discloses the amount of the disagreement with the statement.

(3) Restatements . If a Taxpayer restates its FSI (as defined in section 5.02(2) of this notice) for a taxable year prior to the date that the Taxpayer files its original Federal income tax return for such taxable year, the AFS that reflects the restated FSI (Restated AFS) must be prioritized over the first AFS that is issued for that specific accounting period (Original AFS). If a Taxpayer restates its FSI for a taxable year after the date that the Taxpayer files its original Federal income tax return for such taxable year, see section 11.02(3) of this notice. For purposes of this notice, a Restated AFS is a revised AFS for a specific accounting period that is reissued to correct the Original AFS for that accounting period. Adjustments to the financial results of a prior accounting period that are disclosed in the notes to an Original AFS for comparison purposes (for example, in the case of a change in accounting principle) do not constitute a Restated AFS for that prior accounting period for purposes of this notice.

(4) Annual and periodic financial statements . If a Taxpayer with different financial accounting and taxable years 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 Taxpayer must prioritize the annual financial statements over the periodic financial statements in accordance with section 4.02 of this notice. (5) AFS covering group of entities . (a) In general . If a Taxpayer’s financial results are consolidated with the financial results of one or more other Taxpayers on a Consolidated AFS (as defined in section 2.03(1) of this notice), the Taxpayer’s AFS is the Consolidated AFS. However, except as provided in section 4.02(5)(b) of this notice, if the Taxpayer’s financial results are also separately reported on an AFS that is of equal or higher priority to the Consolidated AFS under section 4.02(1) of this notice (Separate AFS), then the Taxpayer’s AFS is the Separate AFS.

(b) Exceptions to use of Separate AFS . (i) Corporation that is a member of a Tax Consolidated Group . A corporation that is a member of a Tax Consolidated Group must use the Consolidated AFS

that contains the financial results of the Tax Consolidated Group, regardless of whether the corporation’s financial results also are reported on a Separate AFS that is of equal or higher priority to the Consolidated AFS.

(ii) Members of a FPMG . If a Taxpayer is a member of a FPMG and if the FPMG Common Parent (as defined in section 2.04(3) of this notice) prepares a Consolidated AFS (FPMG Consolidated AFS) that includes the Taxpayer, the Taxpayer must use the FPMG Consolidated AFS, regardless of whether the Taxpayer’s financial results also are reported on a Separate AFS that is of equal or higher priority to the FPMG Consolidated AFS.