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FASB issues final standard on income tax disclosures

ARTICLE | December 20, 2023

Authored by RSM US LLP

On December 14, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The changes in this ASU aim to provide more clarity about an entity’s income taxes by enhancing the income tax disclosures mainly related to the rate reconciliation and income taxes paid information.

Rate reconciliation: Requirements for public business entities (PBEs)

On an annual basis, ASU 2023-09 requires a tabular rate reconciliation (using both percentages and reporting currency amounts) that contains the following eight categories:

  1. State and local income tax, net of federal (national) income tax effect
  2. Foreign tax effects
  3. Effect of changes in tax laws or rates enacted during the current period
  4. Effect of cross-border tax laws
  5. Tax credits
  6. Changes in valuation allowances
  7. Nontaxable or nondeductible items
  8. Changes in unrecognized tax benefits

ASU 2023-09 also requires further disaggregation of individual reconciling items that are equal to or greater than a 5% quantitative threshold of an amount, which is determined by multiplying pretax income (loss) from continuing operations by the applicable federal (national) rate. Where the 5% threshold applies, items should be disaggregated by nature within the cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, and disaggregated both by jurisdiction and nature within the foreign tax effects category. Other individual items that are equal to or exceed the 5% threshold, should also be disclosed separately.

Disclosures should also include a qualitative description of the state and local jurisdictions that make up the majority (greater than 50%) of the effect of the state and local income tax category. Except for reconciling items related to changes in unrecognized tax benefits discussed in the section below, the state and local taxes and foreign taxes categories, listed above, should reflect only taxes imposed by the entity’s state and local or foreign jurisdictions, while the changes in the other six categories listed above should only reflect the impact of federal (national) taxes. Entities should also provide an explanation, if not otherwise evident, of the nature, effect, and causes of the reconciling items and any judgment used in categorizing such reconciling items.

ASU 2023-09 requires all reconciling items to be presented on a gross basis with two exceptions:

  • The tax effects of certain cross-border tax laws and the related tax credits (for example GILTI) may be presented on a net basis as one reconciling item.
  • Current year unrecognized tax benefits may be netted and presented in the same category as the position that it relates to, rather than within the unrecognized tax benefits category.
  • Additionally, reconciling items within the changes in unrecognized tax benefits category may be aggregated for all jurisdictions.

Rate reconciliation: Requirements for entities other than PBEs

ASU 2023-09 requires qualitative disclosure about specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.   

Income taxes paid - statement of cash flows related disclosures

Annually, all entities are required to disclose the amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdictions together with income taxes paid, net of refunds, for individual jurisdictions that comprise 5% or more of total income taxes paid.

Other disclosures

All entities are required to disclose, on an annual basis, disaggregated domestic and foreign pre-tax income (or loss) from continuing operations along with disaggregated income tax expense (or benefit) by federal, state, and foreign components.

Additionally, ASU 2023-09 eliminates certain disclosures for all entities that have been determined to no longer be relevant, including disclosure related to changes in uncertain benefits within 12 months, and cumulative temporary differences that have not been recognized due to exceptions under Topic 740.

Effective date and adoption

For public business entities, ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. For entities other than public business entities, ASU 2023-09 is effective for annual periods beginning after December 15, 2025. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted.

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This article was written by RSM US LLP and originally appeared on 2023-12-20.
2022 RSM US LLP. All rights reserved.

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