Article

A Guide to Proposed FASB Updates to Income Tax Disclosures

June 26, 2023
A Guide to Proposed FASB Updates to Income Tax Disclosures

When it comes to corporate tax accounting, calculating the provision for income taxes under ASC 740 can present a technical challenge. ASC 740 governs how companies recognize the effects of income taxes on their financial statements under U.S. GAAP. It mandates a balance sheet approach and requires the netting of all deferred tax assets and liabilities. ASC 740 also provides guidance on complicated tax topics like uncertain tax benefits and reporting and disclosure requirements, including the rate reconciliation.

Since the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update on March 15, 2023, corporate tax professionals need to understand how to accurately complete related disclosure requirements.

Read on to learn more about these proposed FASB disclosure requirements, including how they would impact the tax provision process.

What are the disclosure updates that FASB proposed?

ASC 740 applies only to taxes based on income, not sales, payroll, or property taxes. But public companies must perform a tax rate reconciliation for either the expected tax – based on the statutory rate multiplied by GAAP pretax income – to the total income tax provision, or the statutory rate to the effective tax rate.

FASB’s proposed amendments in its March 2023 update are intended to “enhance the transparency and decision usefulness of income tax disclosures through improvements to the rate reconciliation and income taxes paid disclosures,” the board noted in its Exposure Draft.

In general, the proposed amendments would require public business entities (a term that would replace “public entity”) to make certain mandatory disclosures in financial statements. To do this, these public business entities would annually disclose specific categories in their rate reconciliation and share “additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income [or loss] by the applicable statutory tax rate),” the board noted in its draft.

Amendments would also require entities to disclose new information about the amount of income taxes paid on an interim and annual basis.

These proposed amendments would apply to all entities that are subject to income taxes.

What are the new FASB income tax disclosure requirements?

After noting that it received requests from investors for more transparency about income tax information, FASB explained in its draft that the proposed amendments “would allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks, tax planning, and operational opportunities affect its income tax rate and prospects for future cash flows.”

Under its proposal, entities’ required disclosure on income taxes paid would change. For instance, the year-to-date amount of income taxes paid (net of refunds received) would be disaggregated by federal, state, and foreign taxes on both an interim and annual basis. And the amount of income taxes paid (net of refunds received) would be disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) would be equal to or greater than 5% of total income taxes paid (net of refunds received), on an annual basis.

FASB income tax disclosure requirements also would eliminate the unrecognized tax benefits disclosure around the nature and range estimate of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months. And requirements would eliminate permanent reinvestment disclosure when a nondeferred tax liability is recognized.

How are FASB disclosure rules changing?

Currently, investors rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities. If the updated FASB disclosure requirements become final, tax professionals would need to carry out enhanced disclosure around rate reconciliation and more narrative analysis about changes to these figures. These enhancements would require public business entities to specifically disclose the following categories:

  • State and local income tax and net of federal income tax effect.
  • Foreign tax effects.
  • Enactment of new tax laws.
  • Effects of cross-border tax laws.
  • Tax credits.
  • Valuation allowances.
  • Nontaxable or nondeductible items.
  • Changes in unrecognized tax benefits.

For instance, proposed amendments would require public business entities 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, FASB confirmed in its draft.

How would the proposed disclosure amendments affect valuation allowances?

A valuation allowance is a mechanism that offsets a deferred tax asset account. It reduces recognized deferred tax assets to a “more-likely-than-not” position on the balance sheet, and companies should perform this analysis after considering the two-step recognition standard regarding uncertain tax positions.

Currently, ASC 740-10-30-18 states that future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on whether the company has sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback/carryforward period available under the tax law. ASC 740-10-30-23 also states that an entity shall use judgment in considering the relative impact of negative and positive evidence.

Under FASB’s proposed amendments, public business entities would be required to disclose valuation allowances in addition to other specific categories, FASB noted in its draft. The board further explained that disclosures related to income statements would include adjustments for the “beginning-of-the-year balance” of a valuation allowance due to a change in circumstance that causes a change in judgment about whether a deferred tax asset can be realized in future years.

How would the updated income tax disclosure requirements change the provision process?

Tax professionals would need to calculate updated mandatory disclosures in financial statements for the current year and prior two years, while staying up to date on the in-depth technical and accounting rules under ASC 740. If the FASB disclosure requirements become final, disclosures might become more burdensome and add complexity to the already complicated tax provision process. For instance, tax professionals would find that tie-outs and rate reconciliation would be impacted by new requirements.

In addition, this latest proposed update includes amendments from FASB’s 2019 revised proposed update, which seek to improve disclosure effectiveness in two ways:

  1. Adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (SEC) Regulation S-X 210.4-08(h), Rules of General Application-General Notes to Financial Statements: Income Tax Expense.
  2. Removing disclosures that no longer are considered cost beneficial or relevant.

When would the FASB disclosure updates go into effect?

The comment period for the proposed amendments closed on May 30, 2023. FASB is now reviewing feedback submitted by those who agree and disagree with the proposed changes, including suggestions for alternatives and related reasoning.

The effective date, and whether there will be early adoption of the proposed amendments, will be determined after the board considers stakeholder feedback, FASB noted in its draft, adding that proposed amendments would be applied on a retrospective basis.

Automate your tax provision process

The proposed FASB accounting standards update would dramatically impact ASC 740 reporting and disclosure requirements if enacted. Watch our on-demand webinar Tax Provision: Implementing Automation for a Changing Landscape to learn how to model recent and upcoming tax law changes, how best to organize your data to ensure ease and accuracy, and opportunities to use software to simplify the provision process – so you aren’t caught flat footed if the new FASB rules are enacted.

For more comprehensive provision guidance, download our Essential Guide to ASC 740 for answers to the technical and process challenges that arise from ASC 740 income tax provision calculations and disclosures.

FASB’s proposed ASC 740 updates would mean that disclosure requirements would change, and additional calculations would become necessary. And for professionals who use Excel sheets to calculate their ASC 740 income tax provision, the prior year’s formulas wouldn’t automatically apply, which could lead to calculation errors. That said, automation can resolve these types of process issues. Learn how tax professionals can use ASC 740 tax provision software to manage controls and efficiencies better than in Excel.

The most powerful ASC 740 calculation engine on the market, Bloomberg Tax Provision solves the technical and process issues involved in calculating your income tax provision – taking manual risks out of the equation. Request a demo to see how Bloomberg Tax Provision software can help you save time and ensure accuracy.

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