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 guidance also responds to investor requests for income tax disclosures that help them understand an entity’s potential exposure to changes in tax laws, the resulting risks and opportunities, and the impact of income taxes on cash flow forecasts.
Overview of ASU 2023-09 and Investor Impact
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). Entities may be required to further disaggregate information by taxing jurisdictions when quantitative thresholds are exceeded. Public business entities must expand rate reconciliation table disclosures to include additional categories of information about federal, state and foreign income taxes. More detailed information about 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 the term 'nonpublic entity' with 'entities other than public business entities'.
The 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.
Key Changes for Public Business Entities
Expanded Rate Reconciliation Requirements
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. These categories are intended to help users assess risks and opportunities related to effective tax rates over time and across jurisdictions. The required categories include:
- 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
Thresholds for Disaggregation and Gross Presentation
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 by Jurisdiction
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. Further disaggregation is required for an individual jurisdiction where the amount equals or exceeds 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. Disaggregation by jurisdiction is required for each period presented, but comparative information by jurisdiction for all years is not required. ASC 105-10-05-6 applies to these amendments, allowing entities to omit disclosure for immaterial jurisdictions even if the threshold is met.
Disaggregation of Income Statement Components
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. In the absence of further guidance, this should be applied consistently.
Undistributed Earnings: Removal of Disclosure Requirement
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.
Rate Reconciliation Categories
State and Local Income Tax Effects
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 must 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, entities should begin with the jurisdiction that has the largest effect and add others in descending order until the aggregated effect exceeds 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 5% threshold. Any foreign jurisdiction meeting the threshold should be separately disclosed as a reconciling item. Individual reconciling items in a foreign jurisdiction that equal or exceed the threshold should be separately disclosed by nature and jurisdiction, regardless of whether the total for the jurisdiction meets the threshold.
Impact of Tax Law Changes
The effect of changes in tax laws or rates enacted in the current period reflects the cumulative tax effects of changes in tax laws or rates on current or deferred tax assets and liabilities at the date of enactment. This category applies to changes in the federal (national) jurisdiction. Changes in state and local or foreign jurisdictions should be included in their respective categories.
Cross-border Tax Law Effects
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 in this category equal or exceed the 5% threshold. 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).
Tax Credits
The tax credits category should reflect the effect of tax credits of the federal jurisdiction of domicile. Any reconciling items within this category that equal or exceed the 5% threshold should be separately disclosed. Foreign tax credits were removed from the final ASU due to conclusions regarding netting with related taxes in certain instances. State and local jurisdiction tax credits and foreign tax credits should be included in their respective categories.
Valuation Allowance Changes
The changes in the valuation allowance category reflects valuation allowance initially recognized and subsequent changes in the reporting period for the federal (national) jurisdiction. State and local jurisdiction and foreign jurisdiction valuation allowances should be included in their respective categories.
Nontaxable and Nondeductible Items
The nontaxable or nondeductible item category reflects the tax effect of these items in the federal (national) jurisdiction. Items in state and local or foreign jurisdictions should be included in their respective categories. ASU 2023-09 requires further disaggregation by jurisdiction and by nature when reconciling items in this category equal or exceed the 5% threshold.
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 this category. The tax effect of uncertain tax benefits for current period positions will be included net with the reconciling item.
Entities may aggregate changes in unrecognized tax benefits for all jurisdictions within thiscategory. 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. If this presentation is chosen, changes in unrecognized tax benefits in state and local and foreign jurisdictions should be excluded from their respective categories.
Qualitative Explanations and Materiality Judgments
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 them.
ASU 2023-09 does not define materiality explicitly but refers to general guidance within the Codification. Entities must consider both quantitative and qualitative factors when making materiality assessments. Where significant judgment is exercised, such as with ambiguous reconciling items, entities should evaluate whether the disclosure objective outlined in ASC 740-10-50-11A1 has been achieved and provide explanations where necessary. Documentation of materiality assessments is encouraged, especially when reconciling items are borderline or complex. Disclosure decisions should be guided by whether the information helps users understand the entity’s tax position and risks.
Entities other than public business entities must qualitatively disclose the nature and effect of reconciling items and jurisdictions that significantly impact the effective tax rate. Tabular presentation is optional.
Your Guide Forward
Cherry Bekaert’s Tax Services advisors are available to help address questions regarding the updated FASB income tax disclosure guidance, including implementation strategies and materiality assessments under ASU 2023-09.
