FASB Issues ASU on Income Tax Disclosures
Overview
On December 14, 2023, the FASB issued ASU 2023-09,1 which establishes new income tax disclosure requirements in addition to
modifying and eliminating certain existing requirements. Under the new guidance,
entities must consistently categorize and provide greater disaggregation of
information in the rate reconciliation. They must also further disaggregate
income taxes paid.
The ASU’s disclosure requirements apply to all entities subject to ASC 740.2 As the FASB notes in ASC 740-10-50-11A, the “objective of these disclosure
requirements is for an entity, particularly an entity operating in multiple
jurisdictions, to disclose sufficient information to enable users of financial
statements to understand the nature and magnitude of factors contributing to the
difference between the effective tax rate and the statutory tax rate.”
Public business entities (PBEs) must apply the ASU’s guidance to annual periods
beginning after December 15, 2024 (2025 for calendar-year-end PBEs). Entities
other than PBEs have an additional year to adopt it.
Key Provisions of the ASU
Rate Reconciliation
The ASU amends ASC 740-10-50-12 to require a PBE to disclose a reconciliation
“between the amount of reported income tax expense (or benefit) from
continuing operations and the amount computed by multiplying the income (or
loss) from continuing operations before income taxes by the applicable
statutory federal (national) income tax rate of the jurisdiction (country)
of domicile.” If the PBE “is not domiciled in the United States, the federal
(national) income tax rate in such entity’s jurisdiction (country) of
domicile shall normally be used in the rate reconciliation.” The amendments
prohibit the use of different income tax rates for subsidiaries or segments.
Further, PBEs that use an income tax rate in the rate reconciliation that is
other than the U.S. income tax rate must disclose the rate used and the
basis for using it.
The ASU also adds ASC 740-10-50-12A, which requires entities
to annually disaggregate the income tax rate reconciliation between the
following eight categories by both percentages and reporting currency
amounts:
- 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.
Categories 2, 4, 5, and 7 must be further disaggregated on
the basis of a quantitative threshold of 5 percent “of the amount computed
by multiplying the income (or loss) from continuing operations before income
taxes by the applicable statutory federal (national) income tax rate.” If a
reconciling item is not within any of the eight categories but meets the
conditions for disaggregation on the basis of the 5 percent threshold, it
must be “disaggregated by nature.”
Connecting the Dots
A reporting entity that is domiciled in the United States is required
to separately disclose any reconciling item whose tax effect is
greater than 1.05 percent (21% × 5%) of income from continuing
operations. If a reconciling item does not fit into one of the
prescribed categories and does not meet the conditions for
disaggregation on the basis of the 5 percent threshold, it would be
aggregated with other such reconciling items in an “Other
Adjustments” category. See Appendix B for an
illustration of such a rate reconciliation.
An entity should present all reconciling items on a gross basis, except for
unrecognized tax benefits and certain cross-border tax effects and the
related tax credits, which the entity may choose to present net (i.e.,
unrecognized tax benefits net of the underlying position taken and the tax
effect of certain cross-border tax laws net of the related tax credits). See
additional discussion in the Effects of Cross-Border
Tax Laws and Changes in Unrecognized Tax
Benefits sections below. Further, the presentation of changes in
unrecognized tax benefits related to state and local income taxes and
foreign tax effects may be combined with federal (national) changes, as
further discussed below.
Lastly, the ASU adds ASC 740-10-50-12C, which states that a PBE must “provide
an explanation, if not otherwise evident, of individual reconciling items
required by paragraph 740-10-50-12A, such as the nature, effect, and
underlying causes of the reconciling items and the judgment used in
categorizing the reconciling items.” Each of the eight categories is further
discussed below.
State and Local Income Taxes
This category reflects income taxes imposed at the state and local income
tax level within the jurisdiction (country) of domicile. Changes in
state and local unrecognized tax benefits may be excluded and reported
in the separate category for changes in unrecognized tax benefits. While
the state and local income taxes category does not require further
disaggregation on the basis of a quantitative threshold of 5 percent,
ASC 740-10-50-12B states, in part, that PBEs must “provide a qualitative
description of the states and local jurisdictions that make up the
majority (greater than 50 percent) of the effect of the state and local
income tax category.” Accordingly, a PBE starts with the state and local
jurisdiction that has the largest effect and, if that jurisdiction did
not represent greater than 50 percent of the impact of the category, the
PBE adds the state or local jurisdiction that has the next largest
effect, and so on, until the aggregated effect is greater than 50
percent.
Foreign Tax Effects
This category includes reconciling items attributable to the impact of
income taxes imposed by foreign jurisdictions (i.e., jurisdictions
outside the country of domicile). Changes in foreign unrecognized tax
benefits may be excluded and reported in the separate category for
changes in unrecognized tax benefits. Further disaggregation of
reconciling items within the foreign tax effects category is required by
jurisdiction and by nature on the basis of the 5 percent threshold
discussed above.
Connecting the Dots
As shown in the example in Appendix
B, if the taxes imposed by a particular foreign
jurisdiction create reconciling items with respect to the
jurisdiction that, in the aggregate, exceed the 5 percent
threshold, that jurisdiction should be disclosed separately as a
reconciling item within the category. Any individual reconciling
item within that jurisdiction that also exceeds the 5 percent
threshold should be separately disclosed by nature (i.e., by
jurisdiction and by nature). However, ASC 740-10-50-12A
specifies that “[w]ithin any foreign jurisdiction (regardless of
whether it meets the 5 percent threshold), the reconciling item
shall be separately disclosed by nature if [it] meets the 5
percent threshold.” This may happen when a particular foreign
jurisdiction has a reconciling item or items that individually
trigger the 5 percent threshold but are offset by other
reconciling items that have an opposite impact on the rate
reconciliation (i.e., the net impact of a foreign jurisdiction
is below the 5 percent threshold in the aggregate).
Impacts of Federal (National) Income Taxes
The remaining categories (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, and
changes in unrecognized tax benefits) include only reconciling items
attributable to the impact of federal (national) income taxes for the
jurisdiction (country) of domicile. For example, changes in valuation
allowance related to a federal, state, or foreign jurisdiction must be
disclosed in the changes in valuation allowance category, the state and
local income tax (net of federal [national] income tax effect) category,
or the foreign tax effects category, respectively. Although the changes
in unrecognized tax benefits category includes reconciling items
attributable to the tax effect of positions taken on federal (national)
income taxes, an entity may also choose to include reconciling items
attributable to the impact of positions taken at the state and local
level as well as the foreign level, as further discussed below.
Effect of Changes in Tax Laws or Rates Enacted in the Current Period
This category includes the cumulative tax effects of
a change in enacted tax law or rates on current or deferred tax
assets and liabilities as of the enactment date.
Effects of Cross-Border Tax Laws
This category “reflects the effect of incremental
income taxes imposed by the jurisdiction (country) of domicile on
income earned in foreign jurisdictions.” For a U.S.-domiciled PBE,
this category includes the incremental tax impacts of the global
intangible low-taxed income (i.e., GILTI), base erosion and
anti-abuse tax (i.e., BEAT), and foreign-derived intangible income
(i.e., FDII) rules.
Connecting the Dots
We expect that the incremental impact of the
rules under Subpart F of the Internal Revenue Code and the
branch income rules would also be included in this
category.
Further, PBEs are permitted but not required
to reflect the effect of incremental taxes presented in this
category net of their related foreign tax credits (e.g., an
entity would be permitted to present the effects of GILTI
taxes net of associated foreign tax credits). Alternatively,
PBEs may report the impacts of the incremental taxes
separately from the related tax credits, which would be
presented in the tax credits category. See Appendix
A for illustrative examples.
Tax Credits
This category includes the impacts of federal income
tax credits (e.g., research and development [R&D] tax credits,
or energy-related tax credits) that are not reflected as part of the
effects of cross-border tax laws.
Changes in Valuation Allowances
This category reflects the initial recognition and
subsequent changes to the federal (national) valuation allowance
that occur during the current year.
Nontaxable or Nondeductible Items
This category consists of items that are either
nontaxable or nondeductible. The FASB acknowledged in paragraph BC29
of the ASU that entities may need to apply judgment when assessing
(1) “how to categorize certain income tax effects that do not
clearly fall into a single category” or that have “characteristics
of multiple categories” and (2) “the nature of reconciling items for
further disaggregation. . . . For example, an entity may decide to
include the tax effects of share-based payment awards (such as
nondeductible expenses, shortfalls, and windfalls) in [this]
category” even though windfalls might not be viewed as belonging to
this category. In such a case, the entity should consider whether,
in accordance with ASC 740-10-50-12C, it must describe the types of
tax effects related to share-based payments that it has included in
this category. See the Application of Judgment section below.
Changes in Unrecognized Tax Benefits
This category includes reconciling items resulting
from changes in judgment related to tax positions taken in prior
annual reporting periods. When an unrecognized tax benefit is
recorded in the current annual reporting period for a tax position
taken or expected to be taken in the same reporting period, such
benefit and its related tax position may be presented on a net basis
in the category in which the tax position is presented.
Connecting the Dots
If an entity intends to claim $100 of
federal R&D tax credits on its “as-filed” tax return
but, after considering the recognition and measurement
guidance in ASC 740, determines that it can only recognize
$75 of benefit for such tax credits, the entity may report
in the rate reconciliation a net $75 benefit in the tax
credits category. It would report any subsequent changes in
the recognition or measurement of such credits in the
changes in unrecognized tax benefits category.
Alternatively, an entity may present the $100 of federal
R&D tax credits in the tax credits category and the
related $25 unrecognized tax benefit in the changes in
unrecognized tax benefits category.
Statutory Tax Rate
The ASU adjusts proposed ASC 740-10-50-12 to align with
the requirements in SEC Regulation S-X, Rule 4-08(h)(2).3 In paragraph BC38 of the ASU, the FASB notes that if “an entity
(a) is domiciled in a jurisdiction with an income tax rate significantly
lower than the U.S. statutory income tax rate or (b) operates at or
around break even, the entity would be expected to apply judgment in
determining the appropriateness of using a different statutory income
tax rate and evaluating the materiality of reconciling items.”
Materiality
The Board decided against clarifying in ASC 740 whether
an entity should consider materiality when evaluating the required
disclosures, including identifying reconciling items that meet the
quantitative threshold. Instead, the Board notes in paragraph BC22 of
the ASU that it “observed that the guidance in paragraph 105-10-05-6,
which states that the provisions of the Codification need not be applied
to immaterial items, is applicable to the amendments in [the ASU and
that] an entity does not need to separately disclose the required
specific categories or reconciling items if they are immaterial, even if
the quantitative threshold is met.”
Application of Judgment
In the ASU’s Basis for Conclusions, the FASB
acknowledges that entities will need to use judgment when applying
certain of the ASU’s disclosure requirements. The Board states in
paragraph BC29 that when applying such judgment, an entity “should
assess whether the disclosure objective in paragraph 740-10-50-11A is
met [and] consider whether an accompanying explanation is needed in
accordance with paragraph 740-10-50-12C.” An entity may be required to
use judgment in situations in which, for example, it (1) evaluates
certain reconciling items that may not clearly fall into a single
category or might have characteristics of multiple categories or (2)
operates at or near the break-even point.
Entities Other Than PBEs
Entities other than PBEs are required to qualitatively
disclose the nature and effect of the specific categories of reconciling
items listed in ASC 740-10-50-12A(a) as well as individual jurisdictions
that result in a significant difference between the statutory tax rate
and the effective tax rate. A numerical reconciliation is not
required.
Income Taxes Paid
Income taxes paid must be disaggregated by foreign, domestic, and state
taxes, with further disaggregation by jurisdiction on the basis of a
quantitative threshold of 5 percent “of total income taxes paid (net of
refunds received).”4 Further, comparative information for all periods presented is not
required for the disclosures related to income taxes paid in an individual
jurisdiction under ASC 740-10-50-23.
Disaggregation of Pretax Income and Expense
The ASU adds ASC 740-10-50-10A and 50-10B, which, in a manner consistent with
existing disclosure requirements for PBEs under SEC Regulation S-X, Rule
4-08(h), require all entities to disclose for each annual reporting period:
- “Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.”
- “Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. . . . Income taxes on foreign earnings that are imposed by the jurisdiction of domicile shall be included in the amount for that jurisdiction of domicile (that is, the jurisdiction imposing the tax).”
Indefinitely Reinvested Foreign Earnings
The ASU removes the requirement in ASC 740-30-50-2(b) to disclose the
“cumulative amount of each type of temporary difference [when in accordance
with ASC 740-30-50-2] a deferred tax liability is not recognized because of
the exceptions to comprehensive recognition of deferred taxes related to
subsidiaries and corporate joint ventures.”
Connecting the Dots
While removing the requirement in ASC 740-30-50-2(b), the ASU does
not remove the guidance in ASC 740-30-50-2(c) under which an entity
must (1) disclose the “amount of the unrecognized deferred tax
liability for temporary differences related to investments in
foreign subsidiaries and foreign corporate joint ventures that are
essentially permanent in duration” or (2) provide “a statement that
[such] determination is not practicable.”
Unrecognized Tax Benefits
The ASU eliminates the requirement in ASC 740-10-50-15(d) that entities must
disclose details of tax positions for which it is reasonably possible that
the total amount of unrecognized tax benefits will significantly increase or
decrease in the next 12 months.
Connecting the Dots
In paragraph BC90 of the ASU, the Board notes that an entity must
still apply the guidance in ASC 275-10-50-8 when considering whether
it must provide additional disclosures related to unrecognized tax
benefits.
Reconciliation With ASC Master Glossary
The ASU replaces the term “public entity” throughout ASC 740 with the term
“public business entity” as defined in the ASC master glossary.
Effective Dates and Transition
Effective Dates
The ASU’s amendments are effective for PBEs for fiscal years
beginning after December 15, 2024 (2025 for calendar-year-end PBEs).
Entities other than PBEs have an additional year to adopt the guidance.
Early adoption is permitted.
Transition
Entities may apply the amendments prospectively or may elect retrospective
application.
Appendix A — Presentation of the Effects of Cross-Border Tax Laws
The following examples
illustrate acceptable approaches for presenting the effects of cross-border tax
laws under the ASU.
Example 1
Entity A is a U.S. parent entity. Entity A has no income
or loss on a stand-alone basis, no foreign tax credit
limitation, and consolidates Entity B for financial
reporting purposes. Entity B is a foreign subsidiary
(operating in Jurisdiction Y). Entity B generated pretax
income of $1,000 and has no permanent or temporary
differences in Jurisdiction Y. Jurisdiction Y has a tax
rate of 10 percent. All of B’s income results in a
Subpart F inclusion for A.
Approach 1 (Subpart F/Foreign Tax Credit Gross
Presentation)
Approach 2 (Subpart F/Foreign Tax Credit Net
Presentation)
We note that if B is a disregarded entity, presentation
of the rate reconciliation is expected to be
substantially similar to the example above.
Example 2
Assume the same facts as Example 1, except that instead of Entity B’s
income resulting in a Subpart F inclusion for Entity A,
its income results in a GILTI inclusion for A, subject
to a 50 percent deduction.
Approach 1 (GILTI/Foreign Tax Credit Gross
Presentation)
Approach 2 (GILTI/Foreign Tax Credit Net
Presentation)
Appendix B — Sample Rate Reconciliation Disclosure for a PBE
The example below is reproduced
from Case A in ASC 740-10-55-231.
Contacts
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Paul Vitola
Partner
Deloitte Tax
LLP
Washington
National Tax
+1 602 234
5143
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Christina Benvenuti
Audit &
Assurance
Senior Manager
Deloitte &
Touche LLP
+1 469 417
2349
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Footnotes
1
FASB Accounting Standards Update (ASU) No. 2023-09, Improvements to
Income Tax Disclosures.
2
FASB Accounting Standards Codification (ASC) Topic
740-10, Income Taxes: Overall.
3
SEC Regulation S-X, Rule 4-08(h), “General Notes
to Financial Statements; Income Tax Expense.”
4
The FASB notes in paragraph BC59 of the ASU that the 5 percent
threshold for disaggregation is consistent with the requirement in
SEC Regulation S-X, Rule 4-08(h)(1).