[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.
