The Financial Accounting Standards Board (FASB) has received feedback from investors with requests to provide more information in company disclosures to help them better understand an entity’s exposure to changes in tax laws, potential risks and opportunities to better assess how taxes may impact a company’s forecasted tax cash flows. In response to these requests, FASB drafted an amended approach to income tax effective tax rate disclosures, which will provide additional transparency and a greater level of detail at the material jurisdictional level, which will provide valuable insights.
The FASB has issued Accounting Standards Update (ASU) 2023-09, which introduces significant changes to income tax disclosures and income taxes paid. This update, effective for public business entities (PBEs) for annual periods beginning after Dec. 15, 2024, and for all other entities one year later, aims to enhance transparency and provide more detailed information to investors.
For public business entities, we are only two quarters away from complying. Are you ready for it?
Let's explore the key technical updates, the importance of leveraging third-party technology and potential complications in implementing these changes across various jurisdictions.
Key technical updates
ASU 2023-09 focuses on improving the disclosure of effective tax rates and cash taxes paid. Here are the primary updates:
Rate reconciliation disclosures
Public business entities are now required to disclose a rate reconciliation in both reporting currency amounts and percentages. This includes eight specific categories. Once the eight categories are prepared, the reconciliation must disaggregate items that impact the rate by 5% or more of the pretax income multiplied by the statutory rate. (For example, a reporting entity domiciled in the United States meets the quantitative 5% threshold if the tax effect of the item is greater than 1.05% (21% national rate x 5%) of continuing operations.
Below are the eight categories:
State and local income tax, net of federal (or national) income tax effects
Foreign tax effects
Effect of changes in tax laws or rates enacted in the current period
This article will refer to the eight categories above throughout.
Income taxes paid
Entities must disclose income taxes paid, disaggregated by jurisdiction. This aims to provide investors with a clearer picture of where taxes are being paid and the associated risks.
Let’s start analyzing the rate reconciliation disclosures with items that are clear.
The threshold
The 5% threshold for disaggregating items should be considered by its nature (both the jurisdictional disaggregation and the nature of the item). If items within a jurisdiction meet the 5% threshold, the individual item shall be disaggregated and disclosed separately.
The 5% reconciling items that do not fit into one of the eight categories may be disclosed separately based upon their nature.
Categories three through seven shall only include reconciling items attributable to federal/national income taxes for the jurisdiction (country) of domicile.
For Securities and Exchage Commission (SEC) registrants required to provide comparative financial statements, any reconciling item that meets the 5% threshold for one of the periods shall present the item separately for all periods presented (if thresholds are met). When presenting, just remember – “One for all – and all for one.”
All reconciling items should be presented on a gross basis with the exception of unrecognized tax benefits (may be netted with the associated item, i.e., R&D credits) and cross-border tax effects (may be presented net of foreign tax credits).
ASC 105-10-05-06 states the provisions of the Codification do not need to be applied to immaterial items. While the FASB has not codified guidance quantifying materiality, the ability to not separately disclose immaterial items will allow reporting entities to apply judgment. The ASU states that an entity will not need to separately disclose the required specific categories of reconciling items if they are immaterial, even if the 5% threshold is met. An example of the materiality assessment may arise when a reporting entity has an unusually low pre-tax book income in a given year. Applying the 5% threshold may give rise to an extremely voluminous reporting requirement. At that point, a reporting entity may elect to apply judgment and establish a materiality threshold for reporting to deliver meaningful reporting to the reader of its financial statements. When judgment is applied, a reporting entity may consider whether an accompanying explanation is needed. Also, we recommend discussing with your auditor any item that may meet the 5% threshold but is treated as immaterial.
The categories
1. State and local income tax, net of federal (or national) income tax effects
Once the state and local income tax category is properly completed and disaggregated where necessary, companies are required to provide a qualitative description of state and local jurisdictions that cover the majority (greater than 50%) of the effect of the state and local income taxes category. The description should begin with the jurisdiction with the greatest impact, and in descending order, should add states until the aggregated effect is greater than 50%.
2. Foreign tax effects
Foreign tax effects category should reflect income taxes imposed by foreign jurisdictions. However, changes in unrecognized tax benefits for the foreign jurisdiction may be presented in that category.
Within this category, reconciling items must be disaggregated by jurisdiction and nature if either or both is in excess of the 5% threshold. For example, - a company may find disaggregation due to local statutory rate differential from the reporting jurisdiction, research tax credits and valuation allowances. Additionally, the rate differential between a foreign jurisdiction and the country of domicile must be the federal (national) rates of both jurisdictions. For instance, Canada and Switzerland both have subnational jurisdictions similar to state and local taxes. Those subnational taxes are reported in the separate category for state and local taxes for that country. This is a potential change in current reporting as generally the subnational and national tax rates were combined for these countries.
3. Effect of changes in tax laws or rates enacted in the current period
This category should include the cumulative effects of changes in enacted tax laws and rates on both current and deferred tax assets or liabilities. Consistent with ASC 740 guidance, these adjustments will impact the effective tax rate in the period that includes the enactment date.
4. Effect of cross-border tax laws
This category should reflect the effects of incremental income taxes imposed by the jurisdiction of domicile on income earned in foreign jurisdictions. As such, a U.S. domiciled public business entity may include tax impacts from global intangible low-taxed income (GILTI), Base Erosion and Anti-abuse Tax (BEAT) and foreign-derived intangible income (FDII).
A reporting entity may elect to report these amounts net of any associated credit generated from this category. Alternatively, the amounts may be presented at gross and the associated tax credits can be presented in that category. An example would include the inclusion of Subpart F income and U.S. tax related to foreign branch income being offset with a U.S. foreign tax credit.
5. Tax credits
Tax credits should include federal (national) income tax credits earned in the jurisdiction of domicile. For U.S. domiciled reporting entities, this category may include research tax credits and energy-related credits (among other credits).
This category may also include foreign tax credits if the reporting entity elects to include the amounts here.
State income tax credits and foreign tax credits should be included in categories one and two, respectively (presuming foreign tax credits are elected to be presented separately).
6. Changes in valuation allowances
Changes in valuation allowances should reflect the federal (national) valuation allowance initial recognition or changes for the jurisdiction of domicile during the current year. As such, the valuation allowance changes associated with state or international income taxes should be reflected in those categories. Any federal changes to a valuation allowance shall be presented in this category. Accordingly, if a federal tax credit had an associated valuation allowance, the credit would be presented in the tax credits category and the related valuation allowance would be presented in this category.
Changes in valuation allowances related to state or international tax must be disclosed in category one or two, respectively.
7. Nontaxable or nondeductible Items
This category shall reflect the tax effects of nontaxable or nondeductible items for federal (national) purposes in the jurisdiction of domicile. Items of this nature from foreign jurisdictions should be included in the foreign tax effects category. The same shall apply to state and local tax items of this nature.
The FASB acknowledged that entities may need to apply judgment when assessing how to categorize certain income tax effects that do not clearly fall within a certain category. For example, share-based payment awards may be presented in this category despite the likelihood that excess windfalls may not fall within this category. Additional disclosure may be required if it is not otherwise evident the nature of the item.
8. Changes in unrecognized tax benefits
Reconciling adjustments related to changes in judgment from tax positions taken in prior periods shall be reflected in this category. Examples include subsequent recognition, derecognition and changes in measurement of the unrecognized tax benefit.
With respect to unrecognized tax benefits recorded in the current period related to activity from the same period may be presented on a net basis within the category to which the position is presented. An example of this may arise when a research tax credit is claimed in the current period and an unrecognized tax benefit is recorded against the current period tax credit generated. The unrecognized tax benefit may be netted against the credit in the tax credits category. Alternatively, the full credit may be presented in the tax credits category and the associated unrecognized tax benefit may be presented in this category.
Generally, tax effects of disclosed items may not be aggregated across jurisdictions. However, within the changes in unrecognized tax benefits category items may be aggregated across jurisdictions. Therefore, if a reporting entity includes changes in unrecognized tax benefits in any category other than category eight, the item should not be aggregated across jurisdictions.
If penalties and interest are included in tax expense, taxpayers should consider whether they will be included here or in an “other” category.
Return-to-provision adjustments
Adjustments related to true-up estimates included in a company’s income tax provision to the amounts reported on an entity’s income tax returns must be assessed for proper categorization. Considerations include whether the adjustment is (1) material, (2) in specific categories needing further breakdown due to the 5% threshold and (3) related to a category with a historical trend.
Generally, reporting entities should consider disclosing the return-to-provision adjustments in the categories to which they relate. As such, one might find the adjustments spread across many of the categories.
Income taxes paid
The FASB is requiring entities to disclose on an annual basis the amount of income taxes paid (which includes netting of refunds received) to each jurisdiction in which income taxes paid is equal to or exceeds the quantitative threshold of 5% of total income taxes paid. Income taxes paid must first be disaggregated by domestic, state and foreign taxes, with an additional disaggregation by jurisdiction for amounts that exceed the 5% of total income taxes paid threshold.
When applying the 5% threshold to payments and refunds, reporting entities should compare the absolute value of the net payments (payments less refunds) with the absolute value of the total income taxes paid (net of refunds received).
Third-party technology solutions
Implementing ASU 2023-09 can be complex, especially for organizations operating in multiple jurisdictions. Many companies may elect to utilize third-party technology solutions to streamline the adoption and implementation of the FASB update. Our tax evolution and automation (TEA) team partners with many vendors to provide advisory and implementation services. Following are where third-party technology solutions can provide benefits:
Real-time updates: Tax provision software can incorporate updated financial statement information, ensuring compliance with the most current data and minimize the additional time needed to properly disaggregate line items exceeding the 5% threshold. This is crucial given the frequent updates to financial statements during the closing process and the additional disaggregation requirements as a result of ASU 2023-09.
Enhanced efficiency and accuracy: By automating complex calculations and data collection, third-party technology improves the efficiency and accuracy of tax reporting. This is particularly beneficial for organizations with limited resources and a significant amount of state and global tax return filings.
Advanced reporting capabilities: The ability to have technology solutions provide reporting entities with line items that exceed the 5% threshold will allow tax teams more time to evaluate the materiality and nature of items that may need to be disclosed separately.
Potential complications
While ASU 2023-09 aims to improve transparency, its implementation can pose several challenges:
Jurisdictional variations: Different states and countries have varying tax laws and reporting requirements. Ensuring compliance across all jurisdictions can be daunting and may require significant adjustments to existing processes.
Resource constraints: Many organizations may face resource constraints, both in terms of personnel and technology. The need for detailed and disaggregated disclosures can strain already stretched tax departments.
Application of judgment: The new disclosure requirements necessitate a high degree of judgment, particularly in categorizing and disaggregating information. This can lead to inconsistencies and potential errors if not managed carefully.
Below is an example of an effective tax rate and income taxes paid disclosures under ASU 2023-09.
Example: “ABC Company”
Effective tax rate disclosure
Amounts in (000s)
Year ending
Dec. 31, 2025
Year ending
Dec. 31, 2024
Year ending
Dec. 31, 2023
Amount
Percent
Amount
Percent
Amount
Percent
U.S. federal statutory rate*
6,300.00
21.0%
6,772.50
21.0%
7,560.0
21.0%
State and local income taxes (net of federal income tax effect)**
375.00
1.3%
421.50
1.3%
381.00
1.1%
Foreign tax effects
Country A
Statutory rate difference – U.S. and Country A
(319.50)
-1.1%
(349.50)
-1.1%
(400.50)
-1.1%
Research and development credits
(391.50)
-1.3%
(397.50)
-1.2%
(435.00)
-1.2%
Equity-based payment awards
444.00
1.5%
(340.50)
-1.1%
484.50
1.3%
Other
(34.50)
-0.1%
25.50
0.1%
(22.50)
-0.1%
Country B
Statutory rate difference – U.S. and Country B
(915.00)
-3.1%
(1,072.50)
-3.3%
(1,080.00)
-3.0%
Changes in valuation allowances
(480.00)
-1.6%
(411.00)
-1.3%
382.50
1.1%
Enacted changes in tax laws or rates
-
0.0%
412.50
1.3%
-
0.0%
Other
70.50
0.2%
(105.00)
-0.3%
(34.50)
-0.1%
Country C
(364.50)
-1.2%
(466.50)
-1.4%
(435.00)
-1.2%
Country D
325.50
1.1%
439.50
1.4%
448.50
1.2%
Other foreign jurisdictions (below threshold jurisdictions)
(79.50)
-0.3%
(94.50)
-0.3%
85.50
0.2%
Effect of changes in tax laws or rates enacted in the current period
-
0.0%
-
0.0%
(592.50)
-1.6%
Effect of cross-border tax laws
Global intangible low-taxed income***
345.00
1.2%
349.50
1.1%
381.00
1.1%
Foreign-derived intangible income
(409.50)
-1.4%
(411.00)
-1.3%
(421.50)
-1.2%
Base erosion and anti-abuse tax
349.50
1.2%
370.50
1.1%
391.50
1.1%
Other
25.50
0.1%
-
0.0%
-
0.0%
Tax credits
Research and development tax credits
-
0.0%
(435.00)
-1.3%
(418.50)
-1.2%
Energy-related tax credits
(484.50)
-1.6%
-
0.0%
-
0.0%
Other
-
0.0%
(106.50)
-0.3%
-
0.0%
Changes in valuation allowances
232.50
0.8%
(298.50)
-0.9%
(360.00)
-1.0%
Nontaxable or nondeductible items
Share-based payment awards
(346.50)
-1.2%
357.00
1.1%
465.00
1.3%
Goodwill impairment
432.00
1.4%
390.00
1.2%
-
0.0%
Other
109.50
0.4%
(16.50)
-0.1%
19.50
0.1%
Changes in unrecognized tax benefits
(142.50)
-0.5%
225.00
0.7%
(337.50)
-0.9%
Other adjustments
225.00
0.8%
(270.00)
-0.8%
(255.00)
-0.7%
Effective tax rate
5,267
17.6%
4,989
15.5%
5,807
16.1%
Although not disclosed, noting the 5% threshold amounts for reference
315.00
1.05%
338.63
1.05%
378.00
1.05%
*Reporting entity is a US-domiciled entity with a statutory Federal (National) rate of 21%
** State Taxes in California and New York compiled the majority of the tax effect in this category. (Majority is defined as >50%)
***Note ABC Company has elected to present the Cross-Border item via a Net Presentation
“ABC Company”
Income taxes paid disclosure
2025
2024
2023
Federal
180
140
187
State
40
30
35
Foreign
90
60
68
Total
$310
$230
$290
From the above amounts, income taxes paid (net of refunds) exceed the 5% of taxes paid in the following jurisdictions:
State
California
16
*
15
New York
+
12
*
Foreign
Country A
34
18
23
Country B
22
15
19
* Jurisdictions did not exceed 5% threshold in the year presented
“ABC Company” is not a real company and does not represent client data. The examples were created to showcase models of potential outcomes.
In conclusion, ASU 2023-09 represents a significant step towards greater transparency in income tax disclosures. However, its successful implementation will require careful planning, the adoption of advanced technology or modifications to your existing workpapers or solution and a thorough understanding of the new requirements.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
