Accounting Standards Update Likely to Create Additional ASC 740 Reporting Burden

On August 30, 2023, the Financial Accounting Standards Board (FASB) unanimously voted to finalize the proposed ASC 740 income tax disclosure rules. The FASB’s tentative decision largely affirms the rules and requirements enumerated in Exposure Draft (ED) 2023-ED100 (Topic 740), which addressed proposed changes to the effective tax rate reconciliation presentation and the tax payment information reported in the statements of cash flows.

The ED reflects FASB’s ongoing efforts to improve the transparency and usefulness of financial statement disclosures made in connection with the ASC 740 income tax provision. The changes may require the specific categorization of items rather than allowing for companies to apply judgment in aggregating reconciled items.

This article discusses the proposed changes to the effective tax rate reconciliation presentation and the tax payment information reported in the statements of cash flows.

Rate Reconciliation

Tabular presentation of tax rate reconciliation items is already required, and companies are required to disclose either the dollar amounts or the percentages. The proposed amendments, however, would require public companies to present amounts both the dollar amounts and the percentages for each of the following eight specific categories:

1. State and local income tax, net of federal income tax
2. Foreign tax effects
3. Enactment of new tax laws
4. Effect of cross-border tax laws
5. Tax credits
6. Valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits

Significant qualitative disclosures regarding each of the above eight reconciling items will be required if the new rules are adopted in their current form. Public companies would be required to provide a detailed description of the jurisdictions that comprise the state and/or foreign income tax item categories. Public companies would also need to provide an explanation of individual reconciling items, including detailed information regarding the nature, effect and significant year-over-year changes in any reconciling item.

Additionally, for interim periods, public companies would be required to provide a detailed description of any reconciling item that results in significant changes (on a gross basis) in the estimated annual effective tax rate from the effective tax rate of the prior annual reporting period.

Nonpublic reporting entities are not required to have a tabular disclosure, but continue to be required to provide descriptions and impacts of specific reconciling items that contribute to any “significant” differences between the statutory tax rate and the effective tax rate in narrative form, if a tabular disclosure is not included.

Statement of Cash Flows

All entities would be required to report the amount of cash income taxes paid (net of refunds received) disaggregated by federal, state and foreign taxes. Any state or foreign jurisdiction comprising greater than five percent of total income taxes paid would be required to be reported individually.

Impact and Effective Date

Once adopted, the rules will be applied prospectively while also providing a retrospective option. The amendments will be effective for public business entities for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. The amendments will apply to nonpublic companies for fiscal years beginning after December 31, 2025, and interim periods within fiscal years beginning after December 15, 2026.

These changes will likely bring new costs and complexity in the preparation of the annual and interim income tax provision quantitative and qualitative disclosures. Companies should start a process now to determine whether they are recording financial reporting information at a level of detail that will facilitate a seamless adoption of the new rules.

We can assist public companies as they begin to prepare for FASB’s upcoming rule change. Contact us for information.

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