Updated ASU Enhances Income Tax Disclosure Requirements

by: Megan Worth
Verified by: CPA

February 16, 2024

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For several years, the Financial Accounting Standards Board (FASB) has been evaluating ways to make income tax disclosures more useful to the users of financial statements. In recent years, this focus has sharpened on improving the information organizations disclose concerning the difference between their statutory tax rate and their effective tax rate. 

On December 14, 2023, the FASB issued Accounting Standards Update (ASU) 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU introduced several changes that will require many business entities to disclose more detailed information about their income tax rate reconciliations. 

The rationale behind the changes is to provide investors with increased transparency concerning a company’s cash flows, tax risks, and tax opportunities. The ASU contains different standards for Public Business Entities (PBEs) and private entities. In this introductory overview, we cover the key highlights of the ASU. 

ASU 2023-09: What’s Changing

In a nutshell, ASU 2023-09 requires organizations to include more detailed disclosures concerning their income tax jurisdictions and rate reconciliations. In doing so, organizations will provide additional details that demonstrate how they reconcile their statutory tax rate to their effective tax rate. 

The new standards are applied in a different way for publicly listed companies and private organizations. It’s important for CFOs, controllers, and tax teams to understand how, and when, these changes apply to their own organization. 

Public Business Entities (PBEs)

These changes are most significant for Public Business Entities: organizations that are required to file financial statements with the U.S. Securities and Exchange Commission (SEC)

Under the new ASU, a PBE’s financial statements are required to include income tax disclosures that reconcile the organization’s statutory tax rate to its effective tax rate. This information must be presented in a tabular format with data presented both in dollar and percentage terms. 

Disclosures should include the following rate reconciliation categories where the effect of each category is equal to or greater than 5% of the organization’s applicable statutory tax rate:

  • State and local income taxes
  • Foreign tax effects
  • Effects of changes in tax laws
  • Cross-border tax laws
  • Tax credits
  • Changes in valuation allowances
  • Nontaxable, nondeductible items
  • Changes in unrecognized tax benefits

Any reconciling items that do not meet these categories but exceed the 5% threshold must also be disclosed. Reconciliations should be presented on a gross basis, with the exception of certain cross-border tax law effects and unrecognized tax benefits, which may be presented on a net basis. 

PBEs also need to provide a qualitative description of the state and local jurisdictions that make up greater than 50% of the effect of the state and local income tax category.

For PBEs, these standards go into effect for annual reporting periods beginning after December 15, 2024. The new disclosure standards will be adopted on a prospective basis, with an option to apply them retrospectively. Collecting the required data during the 2024 reporting period will allow companies to become familiar with the process and avoid having to recalculate in 2025. 

Private Entities

The new standards are less rigorous for private entities. These organizations do not have to include tabular calculations explaining rate reconciliations in their disclosures. Instead, they must include qualitative disclosures outlining the reasons for the differences between the organization’s statutory tax rate and its effective tax rate. 

It’s important that these qualitative disclosures reflect an accurate understanding of the effects of the different regulations around tax laws. Disclosures should include a summary of the nature and effect of each of the rate reconciliation categories outlined above that have a significant impact on the difference between the statutory and the effective tax rate. Organizations may include tabular calculations but are not required to do so.

Private entities have an additional year to adopt these new standards. For private entities, these new disclosure requirements will be effective for annual reporting periods beginning after December 15, 2025. 

Smith + Howard: Experienced Tax Professionals

While these new requirements aren’t set to go into effect until organizations begin to prepare 2025 financial reports, they’re important for organizations to be aware of as they begin to compile their 2024 work papers. 

Proactively calculating this data during 2024 allows organizations to set up processes well in advance of the compliance deadline. Organizations will also benefit from increased uniformity in the lookback periods of their disclosures from 2025 onward. 

At Smith + Howard, our tax professionals stand ready to help PBEs and private organizations navigate these new requirements and better define their income tax obligations. With experience supporting organizations across a diverse range of industries and geographies, our team is well-equipped to support organizations in building efficient tax strategies. 

To learn more about Smith + Howard’s business tax services, contact an advisor today.

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