On December 14, 2023, the Financial Accounting Standards Board (FASB) issued final guidance concerning income tax disclosures, labeled Accounting Standards Update No. 2023-09 (ASU 2023-09). This directive, applicable to all entities subject to income taxes, aims to enrich the clarity and utility of income tax disclosures, serving the interests of investors by furnishing them with more comprehensive insights crucial for capital allocation decisions.
ASU 2023-9 Overview
ASU 2023-09, an amendment to FASB Accounting Standards Codification (ASC) Topic 740, mandates annual disclosure of federal, state and foreign income taxes paid (net of refunds received) by all entities. For businesses surpassing specified quantitative thresholds, further disaggregation by taxing jurisdictions may be required. Public business entities are tasked with expanding their rate reconciliation table disclosures to encompass additional categories of federal, state and foreign income taxes.
Notably, ASU 2023-09 dispenses with certain extant requirements concerning uncertain tax positions and unrecognized deferred tax liabilities. The terminology shift, from public entity to public business entity and from nonpublic entity to entities other than public business entities, underlines a semantic refinement. The effective date of this reporting standard varies, with public business entities needing compliance for annual periods commencing after December 15, 2024, while other entities have until annual periods starting after December 15, 2025. Early adoption is permissible for unaudited annual financial statements.
The guidance’s application is primarily prospective, though entities retain the option for retrospective application in prior periods.
What Entities Other Than Public Business Entities Should Know
Rate Reconciliation Disclosures
ASU 2023-09 entities other than public business entities need to qualitatively disclose the nature and effect of the specific categories of reconciling items and individual jurisdictions. This could cause a significant difference between the statutory tax rate and the effective tax rate. A tabular rate reconciliation may be provided but is not required.
Disclosures Required for All Entities
Income Taxes Paid Disclosures
ASU 2023-09 requires all entities to disclose annually 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. The FASB stated that ASC 105-10-05-6 applies to the amendments for this disclosure, where an entity does not need to separately disclose the income taxes paid for any jurisdiction if the amount is immaterial. This is 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 expenses or benefits from continuing operations is similarly disaggregated by federal (national), state and foreign sources.
FASB did not address whether pretax income or loss from continuing operations should be presented before or after intercompany eliminations. Without further guidance, we view this as an accounting policy election that 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 when a deferred tax liability is not recognized under an exception to recognition in ASC 740-30.
Your Guide Forward
Reach out to Cherry Bekaert’s tax services advisors to help answer any questions regarding the new FASB income tax disclosure guidance.
