Before the 2023 calendar year ended, a new Accounting Standards Update (ASU) was issued by the Financial Standards Account Board (FASB) to update the requirements for income tax disclosures under US GAAP. ASU 2023-09 applies to all entities that are subject to income taxes, but some disclosures are only required for public entities. Public business entities must adopt these amendments for annual periods beginning after December 15, 2024, while other entities will have an additional year for adoption (i.e., annual periods beginning after December 15, 2025). The new rules must be applied prospectively for all entities, but retrospective application is permitted.
As the complexity of the business environment increases, the FASB wants to enhance the transparency and decision usefulness of income tax disclosures. It listened to investors and worked diligently to address their concerns to enhance disclosures, allowing them to better understand an entity’s exposure to potential risks and opportunities with jurisdictional tax changes, assess income tax information affecting forecasts and investment decisions, and identify potential opportunities to increase future cash flows. The amendments in ASU 2023-09 cover rate reconciliations, information about income taxes paid, and other items.
One of the most significant areas with new guidance involves information entities provide to bridge the gap from statutory tax rates to effective tax rates, otherwise referred to as rate reconciliation. The FASB is introducing greater disaggregation of information for public business entities by requiring specific categories to be shown, including state and local taxes, foreign tax effects, changes in tax laws, cross-border tax impacts, and more. The new ASU also requires separate disclosure by nature and/or jurisdiction for certain reconciling items that are greater than or equal to 5 percent of income from continuing operations multiplied by the appropriate statutory tax rate. Public entities must also explain the nature, effect, and underlying causes of the various reconciling items as well as judgments used in categorizing them. While entities other than public business entities do not have to comply with the quantitative aspects of rate reconciliation just mentioned, they do need to provide qualitative information about the specific categories of reconciling items that result in significant differences between the statutory tax rate and the effective rate.
The FASB is also introducing new requirements for disclosures regarding income taxes paid for all entities, with a similar flavor to the items noted in items in the rate reconciliation. Under the new ASU, income taxes paid by an entity need to be disaggregated by federal/national, state, and local taxes to show where the entity is experiencing tax burden. Additionally, all individual jurisdictions where taxes paid are greater than or equal to 5 percent of total taxes paid must be disclosed.
ASU 2023-07 includes a smattering of other minor amendments for all entities, including:
- Disaggregation of income (loss) from continuing operations as well as income tax expense (benefit) between domestic and foreign components
- Elimination of the disclosure about the nature and estimate of reasonably possible changes in unrecognized tax benefits in the next 12 months or a statement that there are none
- Removal of the requirement to show the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of exceptions for subsidiaries or joint ventures
As a whole, the new ASU for improvements of income tax disclosures focuses on greater levels of transparency with multiple layers of jurisdiction-level information, from the reconciliation of effective tax rates to income taxes paid and more. There are very specific requirements throughout the update that should prompt all entities to thoroughly read all the new amendments and ensure that everything is being considered when the changes are effective.
Author: Ben Davenport | [email protected]
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