Tax Accounting Minute – Tax Provisions for IPO

In this week’s episode of Weaver: Beyond the Numbers, Tax Accounting Minute, our hosts talk about the importance of the tax provision when a company is considering an IPO or an otherwise “go public” strategy.

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Detailed Description of Weaver: Beyond the Numbers, Tax Accounting Minute, Tax Provisions for IPO

00:00:00
Robert: Hello, I’m Robert Henry. I’m here again with our next episode of Tax Accounting Minute, where we talk all things ASC 740 and income tax accounting.

Today we’re going to talk about the importance of the tax provision when a company is considering an IPO or an otherwise “go public” strategy. We often find that high-growth, rapid growth companies, may be in a full valuation allowance position. As we’ve discussed in our past episodes as to what that may mean, but meaning you’ve got little balance sheet activity on the deferred tax side, and it can be easy to lose sight of the tax provision as you approach these milestone events like an IPO and the need for comparative financials.

So, Deanna, can you talk us through what types of comparative financials are needed and the types of issues that companies need to be looking out for as they approach a potential IPO?

00:00:56
Deanna: Sure. So, first of all, I want to point out the tax provisions are significant targets for SEC comment letters. So going IPO, going public, is going to open up the exposure to that, right? And if the tax provision has not been appropriately presented and properly calculated for all of the comparative years, then restatements of those prior years may be required. At a minimum, transaction delays can arise quickly if the tax provision isn’t considered or it’s a last minute consideration.

So, looking at comparative financial statements, initial filers will need to provide audited balance sheets for the two most recent fiscal years and audited comprehensive income statements for the three most recent fiscal years in their prospectus. All of these periods will require a tax provision to be U.S. compliant and related footnotes.

00:01:47
Robert: So, what we’re saying essentially is if going public is in a company’s five-year plan, that’s why they need to start looking at their tax provision now, as it is a significant estimate and one of the more substantial estimates in the financial statements.

00:02:01
Deanna: Right. Companies that have plans to go public in some form or fashion in the next year or so need to put into place robust processes and procedures around income tax provisions to avoid having the tax provision cause a delay in the financial statement preparation. They will have to then be also prepared to calculate the tax provision on a quarterly and an annual basis going forward.

00:02:25
Robert: I was just going to say in adding to the complexity of all of this, is the fact that you’ve got transactions involved with going public that cause a lot of issues and noise and an income tax provision. So being prepared with the basic blocking and tackling of getting a provision prepared, a good process in place, allows you to leverage that when things become more complex and become more complicated with transactions happening and liquidity event potentially.

00:02:53
Deanna: Right. So, you need to set up some processes and procedures. You need to start thinking about sensitizing your trial balance. You need to think about how you want to prepare the provision, whether you want to use outsourced providers or do it in-house and what software you might want to use. And then also to remember for multinationals that are going public, the exercise needs to be done on a jurisdictional basis. Once you get your processes in place and you’re ready to go every quarter, then you can start focusing a little bit more maybe on the tax issues because IPO companies now need to start looking at even if you’re a lost company. You need to start looking at 382 and these types of things that might impact your provision.

00:03:40
Robert: And all of the disclosures now with listing of payments by jurisdiction, it’s just more and more important to stay in front of these things so that when you are required to go under PCAOB audit standards, you’re ready for that to happen. And, you know, who can help with that is the Weaver ASC 740 tax accounting team.

We hope you found this edition of the Tax Accounting Minute helpful. And we will see you next time.