Income Tax Disclosure Changes Ahead with ASU 2023-09

Public business entities will soon be feeling the effects of the increased footnote disclosure requirements of Accounting Standards Update (ASU) 2023-09. The new ASU, issued December 14, 2023, was issued primarily in response to investor requests for increased transparency into an entity’s income tax information, including how an entity’s operations, associated risks, tax planning and operational opportunities impact its tax rate and potential future cash flows, as well as its sensitivity to tax legislation. The requirements will add both complexity and volume to the annual footnotes and may require companies to gather additional data points.

Enhanced Rate Reconciliation

The tabular rate reconciliation requirement that currently allows companies to present either reporting currency amounts or percentages and allows variation in disclosure categories is being replaced by the requirement to present both reporting currency amounts and percentages in the following eight predefined 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

Reconciling items outside of these categories must also be separately disclosed if the effect of the reconciling item is 5% or more of the statutory tax impact of pre-tax book income from continuing operations.

ASC 740 requires explanations of reconciling items if not otherwise evident regarding the nature, effect, underlying causes and categorization of the reconciling items. Interrelated or interdependent offsetting items must be separately disclosed unless the guidance specifies otherwise.

Several categories, such as the foreign tax effects category, have requirements to disaggregate by jurisdiction and/or nature of the item if certain thresholds are met. Additionally, state and local jurisdictions that make up more than 50% of the state and local category must be qualitatively disclosed.

The rate reconciliation requirements apply on an annual basis to public business entities only. Public business entities that present comparative financial statements should provide information in a manner that allows for proper comparability.

Entities other than public business entities will continue to be subject to the requirement to only provide qualitative disclosures. However, the nature of the disclosures should include specific categories of reconciling items and individual jurisdictions if these reconciling items result in a significant difference between the statutory rate and the effective tax rate.

Income Taxes Paid

Within the statement of cash flows disclosures, income tax payments (net of refunds) must be separated into federal, state and foreign payment categories. Any individual jurisdiction where payments made (net of refunds received) exceed 5% of total net payments must be separately disclosed.

The requirement to disclose cash taxes paid is on an annual basis, and disclosure of comparative information by jurisdiction for all years presented is not required.

Other Disclosures

Pre-tax book income (or loss) from continuing operations must be disaggregated between domestic and foreign. Income tax expense (or benefit) from continuing operations must be disaggregated between federal, state and foreign. Both of these additional disclosures are required for all entities.

The new ASU eliminates the requirement for all entities to disclose changes to the unrecognized benefits balance that are reasonably possible in the next 12 months, as well as the requirement to disclose cumulative types of temporary differences related to certain deferred tax exceptions.

What to Expect Next in 2024

The new update applies to public business entities with annual reporting periods beginning after December 15, 2024, and all other entities with annual reporting periods beginning after December 15, 2025.

While the new disclosures are not required until the 2025 annual reporting period, public business entities should consider the new requirements in their 2024 year-end planning. Current year considerations include:

• Public business entities must provide a brief discussion of new accounting pronouncements not yet adopted in their 2024 10-K and should include a discussion related to this new ASU.
• Public business entities may need to implement changes to accounting, tax and/or reporting systems by the end of the current year to adequately gather the information required to be reported in 2025.
• While the principles of materiality apply to the new disclosure requirements, companies should consider calculating previously netted or blended amounts to support disclosure decisions.

Need help navigating ASU 2023-09? Weaver’s tax professionals are here to guide your company through the new disclosure requirements and prepare for the changes ahead. Contact us to get started.

Authored by Deanna Johnson

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