ASC 740 evolved from FAS 109, a standard introduced in 1992 to bring discipline and consistency to how companies account for income taxes. At its core, ASC 740 requires organizations to translate complex tax laws into financial reporting across every part of the business and every jurisdiction in which they operate. Provisions are calculated jurisdiction by jurisdiction, based on the tax laws in force at the local, state, federal, and international level, turning tax accounting into a comprehensive, enterprise-wide exercise rather than a simple rate calculation.
The standard governs how companies account for income taxes under U.S. GAAP, yet many CFOs still experience it as a “black box”—essential and high risk, but hard to translate into action.Isaac Malul, Vice President, Tax at Prudential Financial, argues that the disconnect is organizational. “Tax is usually not the first person at the table,” he says. “They bring us at the end of the analysis. And that’s usually too late.” For Malul, ASC 740 must be treated as an executive decision tool, with the ability to reveal how business choices, legal structures, and geographic profit mix will shape cash taxes, reported tax expense, and the credibility of a company’s financial narrative.
More Than a Rate Calculation
Malul describes it as “a very logical standard,” but one that requires a level of completeness that can surprise even sophisticated finance teams. The difficulty begins with a misconception that tax expense is essentially pre-tax income multiplied by a rate. “That’s not ASC 740,” Malul says. “You have to look at every income statement expense or income, and every balance sheet asset or liability, and you have to understand what is the treatment of that item for GAAP purposes and how is it treated differently for tax.”
His favorite illustration is property depreciation. A building may have the same initial cost for book and tax, but the depreciation schedules often diverge. “For book purposes you’re going to depreciate that building over, say, 30–39 years straight-line, but for tax you’re generally using 39 years under MACRS for non-residential real property,” he explains. “That difference—or any acceleration via bonus depreciation—creates a temporary difference.” Multiply that concept across hundreds of line items, multiple legal entities, shifting tax laws, and evolving business models, and the “black box” label starts to make sense.
The Provision Is a Forecast, Not a Math Problem
Malul emphasizes that the word “provision” itself is a reminder of the job executives are actually asking tax to do. “Provision means to provide for,” he says. “Providing for means what is going to be the future liability of the company when they file a tax return, but also what is going to be their total future tax expense or benefit they’re going to pay. We have to estimate this expense.” That forward-looking nature is why tax accounting has to be integrated into planning, not bolted on at quarter-end. It is also why deferred tax balances can feel abstract to non-tax leaders. Deferred tax assets and liabilities represent future tax consequences of today’s book-tax differences, and they directly affect equity and earnings.
“A lot of times deferred tax assets and liabilities are sort of a theoretical item for executives,” Malul says. Yet the underlying economics are real. “If the tax burden can be decreased in the future, that’s a deferred tax asset—the real asset today that you can monetize.” Conversely, if future income will trigger additional taxes, “that’s a real tax liability that the company needs to record on its books today and reduce its net equity.”
ASC 740 also pulls executives into judgment-heavy areas that can create audit and disclosure risk: valuation allowances, uncertain positions, and cross-border reinvestment decisions. Malul points to the complexity of “valuation allowances where we measure whether deferred tax assets can be utilized in the future,” and to the APB 23 framework, where companies determine whether foreign earnings are permanently reinvested overseas. Those choices do not just change numbers on a tax footnote. They can change how leadership explains performance.
Preventing Late-Stage Surprises
Malul sees the failure point upstream, in process design. Finance teams routinely implement new systems, launch products, or negotiate acquisitions without tax at the table. “They’re going to set up the general ledger system but omit setting up the accounts that we need and the sub accounts that we need for tax,” he says. When tax is asked to react late, the resulting provision work becomes a scramble, and the business can get locked into structures that are expensive to unwind.
The stakes are not trivial. “Income is subject to tax in the United States at the federal statutory rate of 21%,” Malul says. “In some countries it’s 30% to 40%, like Brazil or Japan.” When profits shift across borders or products are structured without tax consequences modeled, the effective tax rate can move in ways that surprise executives and investors. To reduce that risk, Malul wants Tax to be involved with the forecasting process, with tax embedded in the planning cycle. “It’s important for tax to know the mixture of those projected earnings,” he says, “and the jurisdictions where they are expected to be generated from.”
That mix is more than a geographic allocation. It includes character and permanence. A forecast that assumes $100 million of earnings requires understanding whether income is ordinary or capital, recurring or one-time, and whether parts of it are permanently excluded from tax. Malul points to examples executives understand: “If a company invests in tax-exempt bonds, the interest on those bonds is not taxable,” and certain life insurance structures may also produce tax-favored outcomes. In other words, early collaboration is how leadership avoids a close process that becomes reactive.
Governance That Makes Tax Explainable to the C-Suite
Malul’s approach to governance is practical: regular cadence, shared assumptions, and an executive-ready translation of technical drivers. “The head of tax should meet with the CFO on a regular interval,” he says, “probably every two weeks, every month,” to cover legislative changes, projection performance, and the core assumptions that drive the provision. Tax, he adds, should not simply validate finance’s assumptions after the fact. “Tax also needs to make assumptions as to what permanent items are being projected that are going to affect the taxable income number,” and those assumptions “have to be vetted with the CFO and with controllers.” This is where enterprise tax provision analysis becomes a leadership advantage. When tax teams can clearly isolate the economic drivers behind the tax expense, executives can speak with confidence about what changed, why it changed, and whether it is expected to persist.
AI Will Automate the Mechanics, Then Raise the Bar
Looking ahead, Malul expects automation and AI to reshape tax provision work. “AI is really a very important tool that tax should not be ignoring,” he says. As it becomes embedded, he anticipates that manual, Excel-heavy workflows will be replaced by faster modeling and easier access to historical data. “Assuming five, six years from now that AI is going to be fully incorporated into the tax provision process,” he says, teams will “compute the manual-intensive work in a much more efficient and quick manner.”
The implication is that tax organizations will be judged less on producing the numbers and more on interpreting them. “Understanding those numbers,” Malul says, and “delving into them deeper” will define high-performing tax functions. Faster closes may arrive, but expectations will rise in parallel: more proactive risk management, tighter linkage between tax outcomes and business decisions, and clearer explanation of effective tax rate drivers. For finance executives, the takeaway is to treat ASC 740 as a lens on decision quality. If tax is integrated early, ASC 740 becomes what it was always designed to be: a transparent way to connect strategy to reported results.
Follow Isaac Malul on LinkedIn for more insights or visit his website for more information.
