Benjamim Franklin is generally credited with the proverbial “Nothing is certain except death and taxes” saying. He could have also added that nothing is certain except that tax disclosures will continue to become more robust. With its introduction of Accounting Standards Update 2023-09 Improvements to Income Tax Disclosures (“ASU 2023-09”), released in December 2023, the FASB is requiring additional income tax disclosures to “enhance the transparency and decision usefulness of income tax disclosures,” which are relied upon by investors to evaluate income tax risks and opportunities, particularly the rate reconciliation table and other disclosures.
Why are we talking about a FASB release from 2023?
The new income tax disclosure guidance is effective for public business entities (PBEs) for annual periods beginning after December 15, 2024; for entities other than PBEs, annual periods begin after December 15, 2025. There are no exceptions based on entity size. Guidance is applied prospectively with an option to apply retrospectively. Therefore, the time has arrived for public companies to have their disclosure house in order and for private companies to ensure that they are prepared when it’s their turn.
If it’s just a disclosure, why is it a big deal?
Isn’t that as simple as adjusting some language because the accounting isn’t changing?
Typically, when new guidance relates to a disclosure item, it’s not as significant an undertaking as a change in accounting principle or a new accounting standard. However, there are quantitative and qualitative requirements of the new income tax disclosure guidance that could require significant changes to a company’s accounting system or its processes in order to obtain the necessary information. Maybe you’re one of the lucky ones, and this isn’t a big deal if you don’t have income tax liability in multiple jurisdictions.
On the other hand, if you are a large multinational company, this could be a big deal.
What are the biggest changes?
PBEs will be required to provide a tabular rate reconciliation in percentages and reporting currency of reporting income tax to the product of income or loss from continuing operations and the applicable statutory national or federal income tax rate of domicile using defined categories. In addition, separate disclosures for any reconciling items within certain categories equal to or greater than 5% on an absolute value basis are required. If an item equals or exceeds 5% at any period during the years presented, it must be disclosed for all year. Businesses that are not PBEs do not have to provide quantitative information, but do have to provide qualitative information about the impact on each of the categories.
The FASB defined the following categories to be included in the rate reconciliation:
State and local income tax, net of federal or 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
What are the biggest challenges?
The requirement to present the information required by jurisdiction will require more disaggregated data than has been previously required. For a company that maintains all this information in a spreadsheet or doesn’t have the disaggregation built into their current reporting software, this could be a costly undertaking and increases the risk of error. If the data is in your software, you may still need to do some mining or adjustments to get what you need for the disclosures. Companies may initially underestimate the number of jurisdictions that will need to be reported. For example, if a company is not domiciled in the US, it may need to disaggregate date at a more granular level based on comparable “state and local taxes” in the jurisdiction in which it is domiciled (think Canadian provinces).
What should you do next?
If you have already done the prep work to disaggregate the required information or you operate in few jurisdictions, you may be fine. However, if you haven’t started thinking about this deeply because it’s “just a disclosure requirement,” then you have some work to do to ensure you’re prepared. Even private companies that have an additional year should prepare themselves, maybe considering a “test run” using prior year information to assess the effectiveness of your processes.
It may be true that nothing is certain but death and taxes, but not preparing for compliance with this new disclosure is certain to cause a big headache that you can avoid.
About the Author
Mike Vanscoy is a Principal in SolomonEdwards’ Private Equity Services practice with over 25 years of national and international experience in various aspects of technical accounting and financial reporting, financial and accounting management, audit compliance, financial management standards and internal policies/controls and procedures.
To learn more, connect with Mike on LinkedIn, at mvanscoy@solomonedwards.com or call 610.902.0440.
