FASB Enhances Income Tax Disclosures with New Standard

The Financial Accounting Standards Board (FASB) has released an Accounting Standards Update (ASU) aimed at improving the transparency of income tax disclosures in response to investor demands for more detailed and useful tax information from companies.

FASB Chair Richard R. Jones emphasized that the update, known as ASU No. 2023-09, is a response to calls for more transparent information about company income taxes, aiding investors in assessing tax risks and future cash flow prospects. The update seeks to provide clearer insights into how a company’s operations, tax risks and planning strategies impact its tax rate and financial outlook.

The standard’s key provisions include:

  1. Rate Reconciliation Enhancements: Public companies are now required to disclose specific categories in the rate reconciliation. They must also provide additional information for reconciling items that meet a certain quantitative threshold. This threshold is defined as those reconciling items whose impact is equal to or exceeds 5% of the total determined by multiplying the entity's pretax income (or loss) by the relevant statutory income tax rate.
  2. Income Taxes Paid Disaggregation: The ASU mandates disaggregation of income taxes paid by jurisdiction, enhancing understanding of multinational companies' tax practices.

The ASU’s amendments are effective for PBEs for annual periods beginning after Dec. 15, 2024. For entities other than PBEs, the amendments are effective for annual periods beginning after Dec. 15, 2025. Early adoption is permitted for financial statements not yet issued.

Next Steps

Under the new ASU, both public and private companies must evaluate whether their current tax provision processes meet the detailed requirements of this standard or if adjustments are needed to capture the necessary tax disclosure information.  It's crucial to assess and modify tax provision models now to prepare for these additional disclosure obligations. To ensure alignment with the new standards, we recommend connecting with one of our financial professionals today for guidance and compliance support.

Published on January 11, 2024