The Financial Accounting Standards Board (FASB) released final guidance regarding income tax disclosures on December 14, 2023. Accounting Standards Update No. 2023-09 (ASU 2023-09) applies to all entities subject to income taxes and is intended to enhance the transparency and usefulness of income tax disclosures. The FASB intends for ASU 2023-09 to benefit investors by providing more detailed income tax disclosures that are helpful in making capital allocation decisions.
The new guidance also addresses investor requests for income tax disclosures that can help them understand an entity’s potential exposure to changes in tax laws, ensuing risks and opportunities, and the impact of income taxes on cash flow forecasts.
ASU 2023-9 Overview
ASU 2023-09 amends FASB Accounting Standards Codification (ASC) Topic 740 and requires all entities to annually disclose federal, state and foreign income tax paid (net of refunds received). Business entities may be required to further disaggregate information by taxing jurisdictions when quantitative thresholds are exceeded. The guidance requires public business entities to expand the rate reconciliation table disclosures for additional categories of information about federal, state and foreign income taxes. More detailed information about the reconciling items in some categories may be required based on a quantitative threshold.
ASU 2023-09 eliminates certain existing requirements related to uncertain tax positions and unrecognized deferred tax liabilities. The guidance replaces the term, public entity with public business entity, and replaces the term, nonpublic entity with entities other than public business entities.
The new reporting guidance is effective for public business entities for annual periods beginning after December 15, 2024. For entities other than public business entities, the guidance is effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.
The guidance should be applied prospectively, but entities have the option to apply it retrospectively for prior periods presented.
What Public Business Entities Should Know
Expanded Rate Reconciliation Disclosures
ASU 2023-09 requires public business entities to disclose percentages and amounts in their reporting currency for certain categories in a tabular format with qualitative disclosures on an annual basis. ASU 2023-09 requires the use of the following categories to assist investors with assessing risks and opportunities related to effective tax rates over time and for multiple entities:
- State and local income tax, net of federal (national) income tax effect
- Foreign tax effect
- Effect of changes in tax laws or rates enacted in the current period
- Effect of cross-border tax laws
- Tax credits
- Changes in valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
Qualitative Threshold and Disaggregation
Certain reconciling items are interrelated or interdependent and offset each other. ASU 2023-09 requires certain categories to be further disaggregated for gross presentation. The new guidance sets a threshold of around 5% of the federal (national) tax on operating income or loss. If reconciling items of the same nature equal or exceed the 5% threshold, a disaggregated reconciling item is required to be disclosed.
Disclosures Required for All Entities
Income Taxes Paid Disclosures
ASU 2023-09 requires all entities to disclose annual income taxes paid (net of refunds received) disaggregated by federal (national), state and local, and foreign jurisdictions. ASU 2023-09 requires further disaggregation of information on income taxes paid (net of refunds received) for an individual jurisdiction where the amount is equal to or exceeds a threshold of 5% of the total income taxes paid (net of refunds received). An entity may identify a country, state or local territory as an individual jurisdiction.
ASU 2023-09 requires disaggregation by jurisdiction for each period presented, but it does not require comparative information by jurisdiction for all years presented. ASC 105-10-05-6 applies to the amendments for this disclosure. An entity does not need to separately disclose the income taxes paid for any jurisdiction if the amount is immaterial, even if the threshold is met.
Disaggregation of Income Statement Disclosures
ASU 2023-09 requires all entities to annually disclose the income or loss from continuing operations before income tax from domestic and foreign sources. Income tax expense or benefit from continuing operations is similarly disaggregated by federal (national), state and foreign sources.
The FASB did not address whether pretax income or loss from continuing operations should be presented before or after intercompany eliminations. Without further FASB guidance, this should be applied consistently.
Undistributed Earnings of Subsidiaries and Corporate Joint Ventures
ASU 2023-09 eliminates the requirement to disclose the cumulative amount of each type of temporary difference. This is when a deferred tax liability is not recognized under an exception to recognition in ASC 740-30.
Categories of Information to Add to Rate Reconciliation Table
State & Local Income Tax, Net of Federal (National) Income Tax Effect
The state and local income tax category reflects income taxes imposed at the state or local level in the jurisdiction (country) of domicile. Public business entities are required to provide a qualitative description of the state and local jurisdictions comprising the majority (more than 50%) of the effect of the state and local income tax category.
To determine the state and local jurisdictions that comprise most of the effect, a public business entity should begin with the state or local jurisdiction that has the largest effect. Then, add state or local jurisdictions that have the next largest effect (in descending order) until the aggregated effect is greater than 50%.
Foreign Tax Effects
The foreign tax effect category reflects income taxes imposed by foreign jurisdictions. ASU 2023-09 requires further disaggregation by jurisdiction (country) and by nature when reconciling items in the foreign tax effect category equal or exceed the threshold of 5%.
Any foreign jurisdiction that meets the threshold should be separately disclosed as a reconciling item in the foreign effects category. Any individual reconciling items in a foreign jurisdiction that equal or exceed the threshold should be separately disclosed and jurisdiction, regardless of whether the total for the jurisdiction equals or exceeds the threshold in total.
Effect of Changes in Tax Laws or Rates Enacted in the Current Period
The impact of tax law changes or rates enacted now shows the combined tax effects of those changes on current or future tax assets and liabilities at the same time they are enacted.
This category applies to the effect of the changes in tax law or rates in the current reporting period by the federal (national) jurisdiction. This category is intended to be consistent with prior guidance in ASC 740 related to the effects of changes in tax laws or tax rates.
Effects of tax law changes or tax rates in the current period for state and local jurisdictions and foreign jurisdictions should be included in the state and local income tax category and the foreign tax effects category, respectively.
Effect of Cross-Border Tax Laws
The cross-border tax law category reflects incremental income taxes imposed by the jurisdiction of domicile on income earned in foreign jurisdictions. ASU 2023-09 requires further breakdown when reconciling items within the effect of cross-border tax laws category equals or exceeds the threshold of 5%.
The tax impact of cross-border tax laws and related credits from the domicile jurisdiction on the same income in a single reporting period may be shown net to accurately represent the additional tax expense incurred from income earned overseas.
ASC 740-10-55-231 includes an illustration of a rate reconciliation table that includes the tax effects related to global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT), and foreign-derived intangible income (FDII) in the cross-border tax laws category. Any reconciling items within the effect of cross-border tax laws category that equal or exceed the threshold of 5% should be separately disclosed.
Tax Credits
The tax credits category should reflect the effect of tax credits of the federal jurisdiction of domicile. Any reconciling items within the tax credits category that equal or exceed the threshold of 5% should be separately disclosed.
Foreign tax credits were removed from the final ASU despite being included in the exposure draft due to the conclusions reached regarding the netting of foreign tax credits with the related tax in certain instances (for example, GILTI and GILTI FTCs). State and local jurisdiction tax credits and foreign tax credits should be included in the state and local income tax category and foreign tax effects category.
Changes in Valuation Allowance
The changes in the valuation allowance category reflects the valuation allowance initially recognized and subsequent changes in the reporting period for the federal (national) jurisdiction. Any state and local jurisdiction and foreign jurisdiction valuation allowances initially recognized or additional changes should be included in the state and local income tax category and the foreign tax effects category.
Nontaxable or Nondeductible Items
The nontaxable or nondeductible item category reflects the tax effect of these items in the federal (national) jurisdiction. Nontaxable or nondeductible items in state and local jurisdictions or foreign jurisdictions should be included in the state and local income tax category and the foreign tax effects category.
ASU 2023-09 requires further disaggregation by jurisdiction and by nature when reconciling items in the nontaxable or nondeductible items category equal to or exceeding the threshold of 5%.
Changes in Unrecognized Tax Benefits
ASU 2023-09 updated the disclosure of changes in unrecognized tax benefits. The tax effect of changes in judgment related to tax positions taken in prior periods should be reflected in the unrecognized tax benefits category. The tax effect of uncertain tax benefits for current period positions will be included net with the reconciling item that relates to the uncertain tax position.
ASU 2023-09 permits reporting entities to aggregate changes in unrecognized tax benefits for all jurisdictions within the changes in unrecognized tax benefits category. If a public business entity chooses to follow this presentation, all changes in unrecognized tax benefits should be disclosed in the changes in unrecognized benefits category. Any changes in unrecognized tax benefits in state and local jurisdictions and foreign jurisdictions should be excluded from the state and local income tax category and the foreign tax effects category.
Additional Qualitative Disclosure Requirements
Public business entities are required to provide explanations, if not otherwise evident, of individual reconciling items disclosed, including the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items.
Your Guide Forward
Cherry Bekaert’s tax services advisors are here to help answer any questions regarding the new FASB income tax disclosure guidance.
