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On Dec. 14, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update, No. 2023-09 “Improvements to Income Tax Disclosures.” This Accounting Standards Update enhances the detail that a company is required to disclose within its income tax footnote. The purpose of these updates is to provide the reader of the financial statements with a greater level of detail surrounding a company’s income taxes.
For public companies, these significant changes to reporting will primarily impact its rate reconciliation and disclosure of income taxes paid within its income tax footnote. While these changes primarily impact public companies, there are some more minimal but still meaningful changes to private companies, as detailed below. These amendments are effective for public business entities with fiscal years beginning after Dec. 15, 2024, impacting 2025 for calendar year-end filer. However, these amendments are also effective for entities other than public business entities with fiscal years beginning after Dec. 15, 2025. The added detail below will be required to be disclosed on a prospective basis, however retrospective application is permitted.
For public companies, this update will substantially impact their rate reconciliation, as there are numerous new requirements in rate reconciliation disclosure – including, but not limited to, a breakout into more specific categories, such as state and local income tax, and foreign taxes. Additionally, a public company must break out specific jurisdictions that encompass greater than or equal to 5% of their state and local, and foreign jurisdictions.
Further, public companies will be required to disclose year-to-date income taxes paid, broken out by federal, state and local, and foreign taxes. A breakout of specific jurisdictions where income taxes paid are equal to 5% or more of total income taxes paid will be required. Lastly, pre-tax book income/(loss) will be required to be broken out between domestic and foreign pre-tax book income/(loss).
This update will impact private companies as well, as they will be required to include a qualitative paragraph describing items that result in a significant difference between the statutory rate and the company’s effective tax rate. A quantitative (numerical) reconciliation will not be required.
What does CohnReznick think?
All companies need to be aware of new expansive requirements to income tax disclosures. While these changes are not required until calendar tax year 2025 for public business entities and calendar tax year 2026 for private entities, developing processes around this new ASU will take time, and working to implement a system to track these changes now will help to mitigate the risks of non-compliance and allow for a more accurate comparative view of financial statements once adopted.
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.