Background
On March 15, 2023, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (proposed ASU) that includes certain amendments to Income Taxes (Topic 740). The proposed ASU is the result of several years of deliberation by the FASB originating back to 2014, with the objective of improving transparency and decision usefulness of existing income tax disclosures.
Key Amendments Included in the Proposed ASU
Scope
The amendments in the proposed ASU would affect public business entities as well as organizations other than public business entities that are subject to income taxes.
Enhanced Rate Reconciliation Disclosures
The amendments in the proposed ASU would require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pre-tax income [or loss] by the applicable statutory tax rate).
Public business entities would be required to disclose a tabular reconciliation, using both percentages and reporting currency amounts, according to the following requirements:
1. The following specific categories would require disclosure:
a. State and local income tax, net of federal (national) income tax effect
b. Foreign tax effects
c. Enactment of new tax laws
d. Effect of cross-border tax laws
e. Tax credits
f. Valuation allowances
g. Nontaxable or nondeductible items
h. Changes in unrecognized tax benefits.
2. Separate disclosure would be required for any reconciling item listed below in which the effect of the reconciling item is equal to or greater than 5 percent of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate:
a. If the reconciling item is within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, it must be disaggregated by nature.
b. If the reconciling item is within the foreign tax effects category, it must be disaggregated by jurisdiction (country) and by nature.
c. If the reconciling item does not fall within any of the categories listed in requirement (1), it must be disaggregated by nature.
3. For the purpose of categorizing reconciling items, the state and local income tax category would reflect income taxes imposed at the state or local level within the jurisdiction (country) of domicile, the foreign tax effects category would reflect income taxes imposed by foreign jurisdictions, and the remaining categories listed in requirement (1) would reflect federal (national) income taxes imposed by the jurisdiction (country) of domicile.
For the state and local category, a public business entity would be required to provide a qualitative description of the state and local jurisdictions that contribute to the majority of the effect of the state and local income tax category. A public business entity would be required to provide an explanation, if not otherwise evident, of the individual reconciling items disclosed, such as the nature, effect, and significant year-over-year changes of the reconciling items.
Additionally, on an interim basis, public business entities would be required to provide a description of any reconciling items that result in significant changes in the estimated annual effective tax rate from the effective tax rate of the prior annual reporting period, in addition to the requirement in paragraph 740-270-50-1.
For entities other than public business entities, the rate reconciliation disclosure amendments in the proposed ASU would require qualitative disclosure about specific categories of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.
Income Taxes Paid Disclosure
The amendments in the proposed ASU would require that all entities disclose the following information about income taxes paid:
1. The year-to-date amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes on both an interim and annual basis and
2. The amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received), on an annual basis.
Previously Exposed Amendments
The amendments in the proposed ASU would require that all entities disclose the following information:
1. Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and
2. Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign.
The amendments in the proposed ASU would eliminate the requirement for all entities to (1) disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or (2) make a statement that an estimate of the range cannot be made.
The amendments in the proposed ASU would also remove the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.
Lastly, the amendments in the proposed ASU would replace the term public entity, as currently used in Topic 740, Income Taxes, with the term public business entity as defined in the Master Glossary of the Codification.
Effective Date and Transition Period
The FASB has indicated that the amendments in the proposed ASU should be applied retrospectively. The FASB will determine the effective date and whether early adoption of the amendments in the proposed ASU should be permitted after it considers stakeholder feedback on the proposed amendments.
Next Steps
The FASB comment period concluded on May 30, 2023, where a total of 58 comment letters were received. Per the FASB website, the final ASU is expected to be released by Q4 2023.
Please reach out to us if you would like to learn more or need assistance with implementing these new income tax disclosure requirements once they become effective.
Disclaimer
The information in this article is current as of July 2023 and contains general information only. This article should not be taken as professional tax or accounting advice by PFM LLP. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. PFM LLP shall not be responsible for any loss sustained by any person who relies on any information included in this article.
