ASC 740: FASB releases ASU 2023-09: Improvements to Income Tax Disclosures

ARTICLE | January 09, 2024

Authored by RSM US LLP

Executive summary: Final income tax disclosure ASU issued

On Dec. 14, 2023, the Financial Accounting Standards Board (FASB or Board) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 largely follows the proposed ASU issued earlier in 2023 with several important modifications and clarifications discussed below. ASU 2023-09 is effective for public business entities for annual periods beginning after Dec. 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted.

While entities have some time to comply with the additional disclosure requirements, entities should begin reviewing their provision processes and ensure those processes are designed to collect the necessary data to comply with the requirements.

History of income tax disclosure project

In March 2023, the FASB issued a proposed ASU that was the culmination of a multi-year effort to improve the usefulness of income tax disclosures for investors. The proposal was significantly scaled back in scope from earlier proposals. The revised scope focused primarily on disclosures requiring further disaggregation of the rate reconciliation and income taxes paid. The FASB received many comment letters from preparers, auditors including RSM and investors, and on Aug. 30, 2023 the Board deliberated on the feedback received and agreed to move forward with drafting a final version for Board vote by ballot, resulting in the issuance of ASU 2023-09 on Dec.14, 2023. 

Rate reconciliation disclosures

ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the US statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more.

ASU 2023-09 also identifies specific categories that would require disclosure, including the following:

• State and local income tax, net of federal (national) income tax effect
• Foreign tax effects
• Effect of cross-border tax laws
• Enactment of new tax laws
• Nontaxable or nondeductible items
• Tax credits
• Changes in valuation allowances
• Changes in unrecognized tax benefits.

The following annotated example highlights additional guidance around the rate reconciliation disclosures and how these requirements may differ from current guidance.

[a] – Public business entities must include both reporting currency and percentages within the rate reconciliation. SEC guidance only requires public business entities to present the rate reconciliation in either dollars or percentages. In line with SEC guidance, individual items are required to be presented if they are equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate.

[b] – The guidance indicates that the entity should use the statutory rate of its country of domicile. If such tax rate is not the United States federal corporate tax rate, the entity should disclose the rate and the basis for using that rate. 

[c] – The state and local tax reconciliation item should include all effects of state and local taxes within the country of domicile. ASU 2023-09 indicates that the reconciling items, excluding the foreign tax effects and unrecognized tax benefit (“UTB”) lines, should include only the federal tax effect. Accordingly, the state and local taxes line would be inclusive of all state related items, other than changes in prior year UTBs. The state and local reconciling item is not required to be disaggregated within the ta

[d] –Disaggregation of the foreign tax effects category is required both by jurisdiction and by nature for items that meet the 5% threshold, with the exception of reconciling items related to changes in unrecognized tax benefits. Accordingly, the foreign tax effects line may include disaggregated items such as the effect of the difference between the local country tax rate and the U.S. statutory rate, effects of cross-border tax laws, changes in tax laws, nontaxable or nondeductible items, tax credits or valuation allowances related to such individual foreign jurisdiction. In this example, the entity has certain permanent items in Foreign A that do not exceed the 5% threshold which are presented as ‘Other’ and has other foreign items that individually do not exceed the 5% threshold considering both jurisdiction and nature and thus are aggregated and presented as ‘other foreign jurisdictions.’

[e] – Most items in the rate reconciliation are required to be presented on a gross basis. However, the tax effects of certain cross-border tax laws and the related tax credits may be presented on a net basis. Therefore, where applicable, the cross-border reconciling item would reflect the GILTI inclusion net of any related foreign tax credits. The cross-border tax law reconciling item would also be further disaggregated to the extent the effects of an individual item within the category are equal to or exceed the 5% threshold.

[f] –This line item would reflect only the federal tax effect of any changes in tax law. State or foreign changes in tax law would be included as part of their respective reconciling items as indicated above.

[g] - Nontaxable or nondeductible reconciling items are subject to the further disaggregation requirement to the extent the effects of a nontaxable or nondeductible item are equal to or exceed the 5% threshold. This reconciling item only reflects the federal tax effect of these items.

[h] – Tax credits would be further disaggregated to the extent the effects of a nontaxable or nondeductible item are equal to or exceed the 5% threshold. This reconciling item also includes only the federal tax effect of these items, however, as noted above, certain foreign tax credits may be presented on the effects of cross-border tax laws line. Additionally, credits, or other items resulting in a UTB in the current year, may be presented net of the UTB reserve amount. In this example, the current year R&D credit of $300,000 is presented net of the $75,000 reserve.

[i] – The changes in valuation allowance line reflects only the federal tax effect. Accordingly, if entities have valuation allowances for state or foreign jurisdictions, the change in valuation allowance for those jurisdictions would be included within the respective jurisdiction’s reconciling items as indicated above.

[j] – The reconciling items presented in the changes to unrecognized tax benefits category may be aggregated for all jurisdictions, regardless of the quantitative threshold applied to other items in rate reconciliation. In this example, the changes in unrecognized tax benefit reconciling item includes the reserve release due to the statute of limitations closing for both the Foreign A research credit and the federal research credit. As discussed in item h above, reserves for current year tax positions would be included as part of the current year reconciling item for that tax position.

[k] - Any other items that equal or exceed the 5% threshold that are not included in one of the specific rate reconciliation categories noted above, would also be disclosed separately. 

Public business entities also need to provide a qualitative description of the state or local jurisdictions that drive a majority (greater than 50%) of the state and local income tax category and a qualitative explanation of other reconciling items that represent a significant year-over-year change to the effective tax rate.

ASU 2023-09 requires significantly less information for entities other than public business entities compared to their public counterparts. As under current GAAP, disclosures for entities other than public business entities are qualitative in nature rather than requiring a tabular rate reconciliation. Other than public business entities will be required to include more discussion around the specific categories identified for public business entities and the impact of individual jurisdictions for the components that result in significant differences between the statutory tax rate and the overall effective tax rate for the year.

Disclosure of income taxes paid

ASU 2023-09 makes changes to annual disclosures of income taxes paid for all entities. ASC 2023-09 requires entities to disclose the amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdiction. Additionally, entities are required to disclose income taxes paid, net of refunds received, for individual jurisdictions that comprise 5% or more of total income taxes paid. The 5% threshold is evaluated using the absolute value of the net refund or net payment in each jurisdiction compared to the absolute value of the total income taxes paid (net of refunds received).

The table below shows an entity’s tax payments for the most recent annual period.

As noted above, the entity would be required to disclose the amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdiction its income taxes paid disclosure and further disaggregate any income tax payments or refunds to an individual jurisdiction that are greater than or equal to $110,000 ($2,200,000 x 5%). Accordingly, in addition to disclosing the total federal, state and foreign payments , the entity would be required to separately disclose payments to State A of $200,000 and the refund of $250,000 from Foreign B.

Other disclosure items

ASU 2023-09 requires all entities to disclose disaggregated domestic and foreign pre-tax income (or loss) from continuing operations along with disaggregated income tax expense (or benefit) by federal, state and foreign components. Such disaggregation by jurisdiction should classify taxes by jurisdiction based on the jurisdiction imposing the taxes. For example, withholding taxes imposed by Country X on a remittance from County X to the parent country would be included as foreign taxes.

Prior guidance required all entities to disclose the nature of possible changes in reserves for unrecognized tax benefits in the next 12 months, including an estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made. ASU 2023-09 removes this disclosure requirement. Importantly, in the Basis for Conclusion section of ASU-2023-09, the Board highlights that entities will still need to consider whether a disclosure is required under Topic 275, Risks and Uncertainties, when it is reasonably possible that estimates based on facts as of the balance sheet date will change in the near term, to the extent these changes are identified before the financial statements are available to be issued.

ASU 2023-09 also removes the requirement to disclose the amount of cumulative temporary differences related to a deferred tax liability that has not been recognized due to an exception under ASC 740 (e.g., basis differences related to subsidiaries and corporate joint ventures).