FASB Issues New Guidance on Improvements to Income Tax Disclosures

Does your organization have taxes subject to Topic 740? Then there are new rules from the Financial Accounting Standards Board (FASB) you should know.

FASB has issued new guidance on improvements to income tax disclosures with significant reporting requirements, requiring significant changes for both public and non-public entities. Learn what it could mean for your organization.

Background

In March 2023, FASB issued a proposed accounting standards update (ASU), Income Taxes (Topic 740) Improvements to Income Tax Disclosures, asking financial statement preparers, stakeholders, and auditors to provide comments by May 30, 2023. FASB received many comment letters — CLA’s comments among them.

On August 30, 2023, FASB deliberated on tentative determinations and authorized staff to draft a final ASU indicating the standard’s benefits are expected to outweigh the costs of implementing the standards.

Issued ASU and codification amendments

On December 14, 2023, the FASB issued ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures (the ASU). Below is a summary of the ASU’s codification amendments by category. These amendments could likely impact all entities with taxes subject to Topic 740 that issue financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The ASU includes amendments for both public and private entities.

Rate reconciliation

Public business entities (PBEs) must disclose a tabular reconciliation, on an annual basis, in eight specific categories:

1. State and local income tax, net of federal (national) income tax effect
2. Foreign tax effects
3. Enactment of new tax laws
4. Effect of cross-border tax laws
5. Tax credits
6. Valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits

PBEs must use 5% of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory income tax rate as the threshold (5% threshold) for further disaggregation of reconciling items. For example, if an entity is domiciled in the United States, the impact on the effective tax rate greater than 1.05% would meet this threshold (21% x 5% = 1.05%).

PBEs must also separately disclose any reconciling items listed below where the effect of the reconciling item is equal to or greater than the 5% threshold on an annual reporting basis:

• If the reconciling item is within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, it must be disaggregated by nature. 
  • Entities are permitted to disclose, on a net basis, certain cross-border tax laws effects — such as global intangible low tax income (GILTI) — and their related foreign tax credits.
• If the reconciling item is within the foreign tax effects category, it must be disaggregated by jurisdiction (country) and by nature, except for the tax effects related to changes in unrecognized tax benefits.
• If the reconciling item does not fall within any of the eight specific categories, it must be disaggregated by nature.

PBEs must also disclose on an annual reporting basis:

• Rate reconciliation information using both percentages and reporting currency amounts.
• A qualitative description of the state and local jurisdictions contributing to a majority of the effect of the state and local income tax, net of federal income tax effect category.

Nonpublic entities, defined as “entities other than public business entities” within the ASU must disclose:

• The nature and effect of specific categories of reconciling items and individual jurisdictions resulting in a significant difference between the statutory tax rate and the effective tax rate.

For nonpublic entities, a numerical reconciliation is not required.

Income taxes paid

All entities must annually disclose:

• The amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign.
• The amount of income taxes paid disaggregated by individual jurisdictions where income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received).

Unrecognized tax benefits

The ASU eliminates the requirement for all entities to (1) disclose the nature and estimate of the range of reasonably possible change in the unrecognized tax benefits balance in the next 12 months or (2) make a statement that an estimate of the range cannot be made.

The ASU will permit the aggregation of the changes in the unrecognized tax benefits reconciling categories for all jurisdictions.

Outside basis differences

The ASU removes the requirement contained within ASC 740-30-50-2 to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

Other disclosure requirements

All entities must disclose:

• Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.
• Income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign.

Materiality considerations

The ASU’s basis for conclusions says an entity need not separately disclose both the required specific categories or reconciling items if they are immaterial, even if the quantitative threshold is met, or income taxes paid for any jurisdiction (whether federal, state, or foreign groupings or individual jurisdictions are over 5%) if the amount is immaterial.

This may provide relief for entities potentially looking at significant amounts of reconciling items to include in accordance with the thresholds outlined within the ASU.

Transition and effective date

Amendments should be applied on a prospective basis, with an ability to apply on a modified retrospective basis.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2024. For entities other than public business entities, the ASU is effective for fiscal years beginning after December 15, 2025.

Early adoption is permitted.

How we can help

CLA’s national accounting for income taxes group can help assist in proactive, personalized planning around these significant changes to the required income tax disclosures for both public and non-public entities. Contact us for assistance.