Investors, lenders and other users of financial statements look to income tax footnote disclosures to evaluate how a company’s operations affect its tax rate and future cash flows. While investors use the disclosure of rate reconciliation tables and total cash paid for income taxes to assess income tax risks and opportunities, they want additional transparency about this information to give them a deeper understanding of the business so they can make sound decisions.
As a result, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2023-09 to improve financial statement disclosures relating to income taxes.
Rate Reconciliation Under ASU 2023-09
Public companies will now be required to show a tabular rate reconciliation, disclosing both percentages and dollar amounts, based on an extensive list of specific requirements (as detailed within the ASU). Additionally, for state and local taxes, public companies must provide a qualitative description of the states and localities that comprise a majority of the effect of the state and local tax category.
For privately held companies, the amendments require qualitative disclosure about specific categories of reconciling items and individual jurisdictions that lead to a significant difference between the statutory rate and the effective tax rate. The statutory rate can differ from the effective rate, due to items such as tax credits and permanent differences between income for income tax purposes and income for financial reporting purposes. Some common examples of permanent differences include meals and entertainment expenses, club dues, penalties and lobbying activities.
Treatment of Income Taxes Paid Under ASU 2023-09
For all entities (public or private), the update requires annual disclosure of the amount of income tax paid (net of any refunds):
- That is disaggregated by federal, state, and foreign, and
- To any individual jurisdictions in which the net taxes paid equal at least 5% of total net income taxes paid.
Additionally, the amendments require all entities to disclose the following information:
- Income/loss from continuing operations before income tax expense/benefit, to be disaggregated between domestic and foreign operations; and
- Income tax expense/benefit from continuing operations, to be disaggregated by federal, state and foreign.
Lastly, certain disclosures that were previously required for all companies are eliminated under ASU 2023-09. It is no longer necessary to disclose:
- The nature and estimation of future changes in unrecognized tax benefits; or
- The cumulative amount of temporary differences, by type, when a deferred tax liability is not recognized because of exceptions related to subsidiaries and corporate joint ventures.
These disclosures were ultimately deemed no longer relevant to users of the financial statements.
When Does ASU 2023-09 Go into Effect?
For publicly held companies, these amendments are effective for fiscal years beginning after December 15, 2024. For all other entities, the amendments will go into effect for years beginning after December 15, 2025. Early adoption is permissible for any financial statements that have not yet been issued. Overall, implementing these changes is anticipated to be relatively straightforward, while providing increased benefit to users of financial statements.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.