Enhancing Transparency: Updates on Income Tax Disclosures

Accuracy and transparency are the bedrock of trust. That’s why accurate income tax disclosures are not just a regulatory requirement. They provide investors with vital insights into a company’s tax position, potential risks and uncertainties, and even its corporate governance practices.

Thus, in response to the growing demand from the investor community for enhanced income tax disclosures, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09 pertaining to “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This update addresses the desire for additional information regarding income taxes, catering to the need for improved financial transparency and better decision-making.

Background on Investors’ Feedback

Investors find current disclosures insufficient as they fail to provide a holistic view of the complexities of a company’s tax position. Investors seek additional information beyond the surface-level reconciliation table, enabling them to assess the true implications of a company’s global operations and its ability to effectively manage tax risks and capitalize on tax planning and operational opportunities. Specifically, investors are seeking improved disclosures that provide them with the ability to:

Gain insights into an entity’s potential exposure to changes in tax legislation and the associated risks and opportunities that may arise.
Evaluate income tax information that impacts cash flow forecasts and influences decisions regarding the allocation of capital.
Identify potential opportunities that can contribute to the enhancement of future cash flows.

FASB’s Response

To address the aforementioned investor concerns and recommendations, the FASB issued a proposed accounting standards update in March 2023. It opened said proposal for comments to financial statement preparers, stakeholders, and auditors until May 30, 2023. After receiving their feedback, the FASB In a Board meeting deliberated the issues raised by the stakeholders, leading to the issuance of the final ASU on December 14, 2023.

Key Changes in the Final ASU

The FASB issued a proposed accounting standards update in March 2023 to address investor concerns and recommendations. It opened said proposal for comments to financial statement preparers, stakeholders, and auditors until May 30, 2023. After receiving their feedback, the FASB deliberated the issues raised by the stakeholders in a board meeting, leading to the issuance of the final ASU on December 14, 2023.

Rate Reconciliation

PBEs must annually disclose a tabular reconciliation using both percentages and reporting currency amounts in the following categories:

State and local income tax, net of federal (national) income tax effect
- Under this category, PBEs must give a qualitative description of the state and local jurisdictions that primarily contribute to the impact of state and local income tax.
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

Moreover, separate disclosure is mandated for any reconciling item listed below that has an impact equal to or exceeding 5% of the computed amount, derived by multiplying the income (or loss) from continuing operations pre-tax by the applicable statutory federal (national) income tax rate. Plus, the disclosures must be broken down by nature and/or jurisdiction as follows:

Disaggregated by Nature – If the reconciling item is within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible item categories.
Disaggregated by Jurisdiction (Country) & Nature – If the reconciling item is within the foreign tax effects category.
Disaggregated by Nature – If it does not fall within any of the eight categories specified for rate reconciliation.

Income Tax Paid

Meanwhile, all entities that are subject to income taxes must provide annual disclosures regarding the following:

The total amount of income taxes paid, after deducting any refunds received, categorized by federal (national), state, and foreign
The amount of income taxes paid broken down by individual jurisdictions, where the income taxes paid (net of refunds received) for each jurisdiction is equal to or greater than 5% of the total income taxes paid (net of refunds received)

Other Disclosures

All entities must likewise disclose:

The income (or loss) from continuing operations before income tax expense (or benefit), categorized separately as domestic and foreign
The income tax expense (or benefit) from continuing operations, categorized as federal, state, and foreign

Other Notable Amendments

Use of the term “public business entity”
ASU No. 2023-09 replaces “public entity” with “public business entity.”
Removal of disclosure requirements on:
- Unrecognized Tax Benefits
  Under the ASU, all entities are no longer required to:
  — Disclose the nature and estimate of the potential range of change in the balance of unrecognized tax benefits in the coming 12 months or
  — State that it is not possible to estimate the range.
- Outside Basis Differences
  The update eliminates the need to disclose the total accumulated value of each specific type of temporary difference when a deferred tax liability is not recognized due to exceptions regarding the comprehensive recognition of deferred taxes of subsidiaries and corporate joint ventures.

Implementation and Compliance

As we consider the implementation and compliance aspect of the new ASU, you must be aware of key details and take proactive steps to adhere to the updated guidelines.

The effective date for implementing the new ASU varies depending on the entity type. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2024. For entities other than public business entities, the ASU is effective for fiscal years beginning after December 15, 2025. These dates provide a timeline to prepare and make necessary adjustments in your financial reporting practices.

Complying with the updated guidelines involves a series of steps. It starts with a comprehensive assessment of the ASU’s impact on the organization’s financial reporting. Our experts can help evaluate these effects, providing guidance on the necessary adjustments and changes to ensure compliance. We work collaboratively with your team to develop a plan of action, considering your unique needs and circumstances.

Auditors, like our team at MBE CPAs, provide independent and objective financial statement assessments, assuring that your financial reporting aligns with the updated guidelines. By partnering with us, you gain access to a wealth of knowledge and expertise and a community that fosters collaboration and success. Let us be your trusted partner in navigating the intricacies of implementation and compliance, ensuring that your organization remains at the forefront of financial reporting standards!

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