Adrian JohnsonTLDR:
-The Financial Accounting Standards Board (FASB) has released a new Accounting Standards Update (ASU) designed to improve the transparency of income tax disclosures.
-FASB Chair Richard R. Jones stated that the update, known as ASU No. 2023-09, responds to investor demands for more detailed and useful tax information from companies.
-Some key provisions of the update include enhancements to rate reconciliation and requirements for the disaggregation of income taxes paid by jurisdiction.
-The ASU will be effective for public business entities (PBEs) starting in 2024 and for other entities starting in 2025.
The Financial Accounting Standards Board (FASB) has released an Accounting Standards Update (ASU) aimed at improving the transparency of income tax disclosures in response to investor demands for more detailed and useful tax information from companies. FASB Chair Richard R. Jones emphasized that the update, known as ASU No. 2023-09, is a response to calls for more transparent information about company income taxes, aiding investors in assessing tax risks and future cash flow prospects. The update seeks to provide clearer insights into how a company’s operations, tax risks, and planning strategies impact its tax rate and financial outlook.
The ASU includes several key provisions for enhancing income tax disclosures. Firstly, public companies are now required to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a certain quantitative threshold. This threshold is defined as those reconciling items whose impact is equal to or exceeds 5% of the total determined by multiplying the entity’s pretax income (or loss) by the relevant statutory income tax rate. This requirement aims to provide investors with a clearer understanding of how a company’s tax rate is affected by different factors.
Additionally, the ASU mandates the disaggregation of income taxes paid by jurisdiction. This will help investors gain a better understanding of multinational companies’ tax practices and the allocation of income taxes across different geographic areas. By providing this information, companies can address investor demands for transparency and allow for better analysis of tax risks and cash flow implications.
The ASU’s amendments will be effective for public business entities (PBEs) for annual periods beginning after December 15, 2024. For entities other than PBEs, the amendments will be effective for annual periods beginning after December 15, 2025. Early adoption is permitted for financial statements not yet issued.
As a result of these new requirements, both public and private companies will need to evaluate their current tax provision processes to ensure compliance with the detailed requirements of the ASU. This may involve making adjustments to capture the necessary tax disclosure information and modifying tax provision models. It is crucial for companies to assess and modify their tax provision processes now to prepare for these additional disclosure obligations.
In conclusion, the FASB’s new ASU aims to enhance the transparency of income tax disclosures in response to investor demands. The provisions of the ASU require specific categories in rate reconciliation and the disaggregation of income taxes paid by jurisdiction. Companies will need to evaluate their current processes and make adjustments to meet the detailed requirements of the ASU. Compliance with the new standards is essential to provide investors with the necessary information for assessing tax risks and cash flow prospects.
