How FASB Improvements to Income Tax Disclosures Impact Your Rate Reconciliation Process

In December 2023, the Financial Accounting Standards Board (FASB) released an Accounting Standards Update (ASU) that dramatically impacts income tax provision reporting and disclosure requirements.

The update includes several amendments to address investor calls for more information about income taxes.

Those changes include:

• Enhanced disclosures around rate reconciliations
• Disclosure of income taxes paid
• Adding income tax expense as a disclosure
• Disaggregation of domestic and foreign income (or loss) from continuing operations before income tax expense (or benefit)
• Disaggregating by federal, state, and foreign taxes the income tax expense (or benefit) from continuing operations
• Eliminating unrecognized tax benefits (UTB) disclosure around the nature and estimate of the range of the reasonably possible change in the UTB balance in the next 12 months
• Eliminating the cumulative amount of each nonrecognized deferred tax liability
• Disclosure of states that make up the majority (greater than 50%) of state tax expense

This article will focus on the first two changes, as they require significant changes to your current process for calculating ASC 740 income tax provision and preparing disclosures.

Enhanced rate reconciliation disclosures

The FASB update requires public business entities (PBEs) to disclose percentages and amounts in their reporting currency in their rate reconciliation table for the following categories:

• State and local income tax, net of federal income tax effect. PBEs are required to provide a qualitative description of the states and local jurisdictions that make up the majority (greater than 50%) of the reconciling item for state and local taxes.
• Foreign tax effects, including any state or local taxes in foreign jurisdictions. PBEs need to separately disclose reconciling items by nature and by jurisdiction when the individual reconciling items in this category are equal to or exceed a threshold of 5% of the amount computed by multiplying the pretax income (or loss) by the applicable statutory income tax rate.
• Effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items. PBEs need to separately disclose these reconciling items by nature, based on a quantitative threshold of 5%.
• Effect of changes in tax laws or rates enacted in the current period
• Changes in valuation allowances
• Changes in unrecognized tax benefits

Any other reconciling item in these categories that meets the 5% threshold has to be disaggregated by nature.

Example of FASB increased rate reconciliation transparency

The update will be applied retrospectively for all periods presented. The update included the following example reconciliation to be disclosed by a PBE. In the example, the entity is domiciled in the U.S. and presents comparative financial statements.

Income taxes paid

The ASU will require all entities to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes on an annual basis.

All entities are also required to disclose annually income taxes paid (net of refunds received) by jurisdiction if the amount equals or exceeds a quantitative threshold of 5% of total income taxes paid (net of refunds received).