Written by: Nicholas Drago & Zachary D. Miller
FASB Released New ASU Guidance: What Does it Mean for you?
Key Takeaways:
- ASU 2023-09 aims to improve income tax disclosures for financial reporting.
- Public entities must comply starting with annual periods after December 15, 2024, and other entities after December 15, 2025, with early adoption allowed.
- Public entities must disclose rate reconciling items in both percentages and currency amounts.
- Disclosures must include specific categories like state and local taxes, foreign tax effects, and tax credits.
- All entities must disclose income taxes paid or received by jurisdiction and detail income tax expenses by federal, state, and foreign jurisdictions.
On December 14, 2023, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2023-09 guidance to improve income tax disclosures for financial reporting. The revised standards are intended to benefit investors and users of the financial statements by providing more robust and standardized income tax disclosures. The new requirements will be applicable for all business entities and will be effective for public entities beginning for annual periods after December 15, 2024. All other entities will be effective for annual periods beginning after December 15, 2025. Early adoption of ASU 2023-09 is permitted and may be applied retrospectively.
What Does ASU 2023-09 Focus on?
One of the focus areas of these tax disclosure improvements is the rate reconciliation. ASU 2023-09 now requires public business entities to disclose the rate reconciling items as both percentages and the reporting currency amounts within the rate reconciliation. This is a change from past requirements where public business entities had the option to present the reconciliation in either a dollar amount or percentage format.
Another new ASU rate reconciliation requirement for public business entities is a separate disclosure for any rate reconciling item that exceeds 5% of the pretax from continuing operations tax effected by the jurisdictional tax rate of the entity. The ASU also requires any foreign owned entities to use the foreign tax rate of the parent entity’s country of domicile in the rate reconciliation.
The ASU requires disclosure of rate reconciling items within these standard categories:
- State and local income tax, net of federal (national) income tax effect
- Foreign tax effects
- Effect of changes in tax laws or rates enacted in the current period
- Effect of cross-border tax laws
- Tax credits
- Changes in valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
For non-public business entities, consistent with prior regulations, the ASU does not require a numerical reconciliation, but does require the disclosure of the nature and effect of the categories, as well as the jurisdiction of the reconciling items.
Below is an example of the new rate reconciliation format:
ASU 2023-09: New Rate Reconciliation Format
Within the ASU, there were also amendments to the requirements regarding disclosure of income taxes paid. ASU 2023-09 now requires all business entities to disclose the amount of income taxes paid or received for the year broken out by jurisdiction for federal, state, and foreign income taxes. The ASU also now requires that all business entities disclose income (or loss) from continuing operations before income tax expense, as well as break out income tax expense (benefit) between federal, state, and foreign jurisdictions.
If you are a calendar year public filer, these disclosures will be required starting with your December 31, 2025, 10-K filing. Non-public filers will be required to adopt this disclosure starting with their December 31, 2026, year-end financial statement. Financial statement preparers should begin thinking through the impact of these disclosures and ensure that you have the processes in place to support the level of disclosure required.
If you have any questions about the disclosures or what the adoption of the ASU might look like for your company, please reach out to a member of Wolf’s Tax team to begin the discussion.
