The Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update (ASU), Income Taxes (Topic 740): Improvements to Income Tax Disclosures.
The proposed ASU would expand the income tax rate reconciliation disclosure and income taxes paid information to address investor requests for more transparent income tax disclosures.
The proposed amendments would apply to all entities subject to income taxes, with certain proposed disclosure requirements only applicable to public business entities (PBEs).
Comments are due May 30, 2023.
Key Provisions
During the FASB’s 2021 agenda consultation process, investors expressed concern that existing income tax disclosures don’t provide sufficient information to understand the tax provision for an entity that operates in multiple jurisdictions. According to feedback received by the FASB, investors want to better:
- Understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities
- Assess income tax information that affects cash flow forecasts and capital allocation decisions
- Identify potential opportunities to increase future cash flows
Rate Reconciliation Disclosures
Under current generally accepted accounting principles (GAAP), PBEs are required to disclose a reconciliation between the reported income tax expense (or benefit) from continuing operations and the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal income tax rate of the jurisdiction of domicile.
To address investors’ requests for greater transparency, the proposed amendments would prescribe the disaggregation of information to be presented in the rate reconciliation. On an annual basis, PBEs would be required to provide a tabular rate reconciliation containing specific categories, using both percentages and reporting currency amounts. Additional information would be required for reconciling items that meet a quantitative threshold.
In the tabular rate reconciliation, PBEs would be required to disclose the following eight categories:
- State and local income tax, net of federal income tax effect
- Foreign tax effects
- Enactment of new tax laws
- Effect of cross-border tax laws
- Tax credits
- Valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
For the state and local category, PBEs would 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.
Further disaggregation would be required for the following reconciling items in which the effect is equal to or greater than 5% of the amount computed by multiplying pretax income (or loss) by the applicable statutory federal income tax rate:
- 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
- If the reconciling item is within the foreign tax effects category, it must be disaggregated by jurisdiction, or country, and by nature
- If the reconciling item doesn’t fall within any of the eight required categories listed above, it must be disaggregated by nature
If not otherwise evident, PBEs would provide an explanation of the individual reconciling items disclosed, such as the nature, effect, and significant year-over-year changes of the reconciling items.
See the proposed ASU for an example of a rate reconciliation disclosed by a PBE.
Interim Disclosures
On an interim basis, PBEs 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.
Entities Other Than Public Business Entities
Nonpublic entities are currently required to disclose the nature of significant reconciling items but may omit a numerical reconciliation.
To improve qualitative disclosures, the proposed amendments would require entities other than PBEs to provide qualitative disclosure, including the nature and effect, of 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 Disclosures
To further enhance investors’ understanding of an entity’s income taxes, the proposed amendments would require all entities to disclose the following information about income taxes paid:
- On both an interim and annual basis, the year-to-date amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes
- On an annual basis, 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% of total income taxes paid (net of refunds received)
Disclosures Previously Exposed for Comment
The proposed ASU carry forward certain amendments from the 2019 revised proposed ASU on income tax disclosures that would require all entities to disclose the following information:
- 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, state, and foreign
However, the proposed amendments would eliminate the requirement in the 2019 revised proposed ASU for all entities to “disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months.”
The proposed amendments 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.”
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For more information on how the proposed amendments could affect your business, contact your Moss Adams professional.
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