Company: CNDT
Filing Date: 2025-02-19
Form Type: 10-K
Source: 0001677703-25-000029
Chunk: 84

Company: CONDUENT Inc
Filing Date: 2025-02-19
Form: 10-K
Item: Item 8
Chunk 84
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 audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Recognition of a Built-in Capital Loss Related to the Internal Reorganization of the Top Tier Foreign Holding Company 

As described in Note 14 to the consolidated financial statements, the Company recorded a tax provision of $78 million for the year ended December 31, 2024. In the fourth quarter of 2024, the Company implemented an internal reorganization in which it sold a portion of its top tier foreign holding company to a lower tier subsidiary. This transaction and a subsequent tax election to treat the holding company as a partnership resulted in recognition of a built-in capital loss for tax purposes that offset capital gains from divestitures, resulting in net tax savings of $59 million. The determination of the tax characteristic of this transaction requires management to make judgments about the application of tax laws and regulations. The United States Internal Revenue Service could determine a different tax treatment that would have an adverse impact on the Company.

The principal considerations for our determination that performing procedures relating to the recognition of a built-in capital loss related to the internal reorganization of the top tier foreign holding company is a critical audit matter are (i) the significant judgment by management in applying tax laws and regulations in determining the built-in capital loss to be recognized related to the internal reorganization; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the built-in capital loss recognized related to the internal reorganization based on management’s application of tax laws and regulations; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to accounting for income taxes, including management’s judgments in applying tax laws and regulations in determining the built-in capital loss to be recognized related to the internal reorganization. These procedures also included among others (i) evaluating the step-plan for the internal reorganization; (ii)