In 2023, FASB issued Accounting Standards Update (ASU) 2023-09, Improvements to Income Tax Disclosures. Why is this being introduced?
Investors want greater transparency about their potential investments, and they’ve requested that income tax disclosures be enhanced as a result. Essentially, taxpayers will have to provide more detailed and disaggregated information so investors can gain a better sense of their tax obligations and how they could impact their investments.
For public business entities, the changes are effective for annual periods beginning after December 15, 2024. Other entities have a one-year deferral.
What are the new disclosures that will be required in the income tax footnotes of financial statements?
Key changes for public business entities involve disaggregated information in the rate reconciliation and income taxes paid. Now, annual rate reconciliations must include both percentages and reporting currency amounts, and items must be categorized into eight standardized groups. Should items in certain categories exceed a 5% threshold of pre-tax income times the federal statutory rate, they will require separate disclosures by nature and, in some cases, by jurisdiction. Lastly, a qualitative description is required, noting jurisdictions that comprise greater than 50% of the state and local income tax impact. Non-public business entities will see increased qualitative disclosures.
Income taxes paid, net of refunds received, must be disaggregated into three categories: federal, state and local, and foreign. Further disaggregation, by jurisdiction, is required when a 5% threshold is exceeded.
How will this impact the tax provision process?
While ASU 2023-09 doesn’t change how the income tax provision is calculated, the data needed to prepare it must be more granular. Tax will have to work closely with other departments to ensure they capture tax payments by jurisdiction and reconcile these to cash-flow statement disclosures. Domestic and foreign activities must now be disaggregated, so companies may need to rethink their data collection process, update software and spreadsheets, and provide additional supporting documentation. Some companies may need to pivot from a blended state rate to a detailed state-by-state provision calculation.
How should tax departments prepare now?
Ensure those involved in the tax provision process, your audit team, and the C-suite thoroughly understand the changes that will impact your company. Identify data gaps within your organization. Can you capture taxes paid by jurisdiction? Can you identify material state jurisdictions? How will you identify ETR reconciling items, and can you disaggregate them by category, nature, and jurisdiction, as required?
If you’re preparing the provision manually, you may want to consider software that can automate the rate reconciliation changes, including flexibility with identifying reconciling items and a streamlined process for calculating state-by-state provisions. Create processes to collect new data and develop a plan well before crunch time.
