Executive summary:
On March 15, 2023, the Financial Accounting Standards Board (FASB) released a proposed Accounting Standards Updates (proposed ASU) that includes certain amendments to Income Taxes (Topic 740). The proposed ASU is the result of several years of deliberation by the FASB and multiple rounds of feedback from stakeholders, including financial statement preparers and readers of financial statements. The proposal aims to improve the transparency and consistency of income tax disclosures by expanding the required disclosures around the rate reconciliation and income taxes paid. The FASB is taking comments on the proposed ASU through May 30, 2023 and will consider these comments in finalizing the ASU.
What is included in the proposed ASU
Rate reconciliation disclosures
The proposed ASU would require public business entities to disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continued operations by the applicable statutory rate. For companies 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.
Under current guidance from the U.S. Securities and Exchange Commission (SEC), public business entities would be required to disclose the reconciling items between the statutory tax rate and the company’s effective tax rate and may present the reconciling items in either dollars or percentages. The FASB has adopted a similar rule to the SEC guidance and would require public business entities to include a dollar amount in reporting currency along with the percentage difference from the applicable statutory rate in a tabular format. The proposed ASU 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
- Enactment of new tax laws
- Effect of cross-border tax laws
- Tax credits
- Valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
In addition to the above categories, the proposed ASU would require disaggregation of certain categories if the individual items within those categories are equal to or greater than the 5% threshold described above. The proposed ASU specifically identifies the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items as categories that would require disaggregation. Additionally, disaggregation is required by jurisdiction and nature for items within the foreign tax effects category that meet the 5% threshold. Any other items that do not fall into one of the above rate reconciliation categories would also be disclosed separately to the extent they are equal to or exceed the 5% threshold.
To categorize reconciling items appropriately in accordance with the proposed ASU, the state and local income tax category would reflect income taxes imposed at the state or local level within the jurisdiction (county) of domicile. The foreign tax effects category would reflect income taxes imposed by foreign jurisdictions and the remaining components would reflect federal (national) income taxes imposed by the jurisdiction (country) of domicile.
Public business entities would also need to provide a qualitative description of the state or local jurisdictions that drive the state and local income tax category and an explanation of other reconciling items that present a significant year-over-year change to the effective tax rate.
On an interim basis, in addition to providing a description of the effective rate drivers as required under current guidance, public business entities would be required to disclose significant changes in rate reconciling items between the current interim period and the prior annual reporting period.
The proposed ASU would require significantly less information for entities other than public business entities compared to their public counterparts. As under current GAAP, the disclosures would be qualitative in nature rather than requiring a tabular rate reconciliation. However, entities would be required to include more discussion around the specific categories identified above and the impacts 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
The proposed ASU would require both public and non-public business entities to disclose the year-to-date amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdictions on both an annual and interim basis. For annual periods, entities would be required to disclose income taxes paid, net of refunds, for individual jurisdictions that comprise 5% or more of total income taxes paid.
Other disclosure items
The proposed ASU would require 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. The proposed ASU indicates that disaggregation by jurisdiction should classify taxes by jurisdiction based on the jurisdiction imposing the taxes.
The proposed ASU would also eliminate certain disclosures for all entities that have been determined to no longer be relevant including certain items related to unrecognized tax benefits and cumulative temporary differences that have not been recognized due to exceptions under ASC 740.
Under current guidance, entities are required to disclose additional information around tax positions for which the reserve for unrecognized tax benefits could reasonably change in the next 12 months, including the nature of the uncertainty and a range of the possible change or a statement that an estimate cannot be made. Additionally, under current guidance, entities are required to disclose the cumulative temporary differences that have not been recognized due to an exception to under ASC 740 (e.g., deferred taxes related to subsidiaries and corporate joint ventures). The proposed ASU would remove these requirements.
Effective date notes
The effective date and early adoption of the amendments in the proposed ASU will be determined after the Board considers stakeholder feedback and will be applied retrospectively.
