Article
Proposed FASB Changes to Income Tax Disclosures: Are Blended State Rates Over?
[Watch our on-demand video on proposed FASB changes to income tax disclosure.]
In March 2023, the Financial Accounting Standards Board (FASB) released a Proposed Accounting Standards Update (ASU) that would dramatically impact income tax disclosures.
The Exposure Draft includes several proposed changes intended to address investor calls for more information about income taxes.
Those proposed changes include:
- Enhanced disclosures around rate reconciliations
- Disclosure of income taxes paid
- Adding income tax expense as a disclosure
- Disaggregation between domestic and foreign taxes of income (or loss) from continuing operations before income tax expense (or benefit)
- Disaggregating by federal (national), 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 DTL
- Disclosure of states contributing to the majority of state tax expense
The first two changes are where we’ll focus in this article, as those are the main components of the exposure draft and the areas that could require significant changes to your current process for calculating income tax provisions and preparing disclosures.
Enhanced disclosures around rate reconciliations
If enacted, the FASB proposal would require 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 (national) income tax effect: PBEs would be required to provide qualitative disclosures about state taxes that contribute the majority of the reconciling item for state and local taxes.
- Foreign tax effects, including any state or local taxes in foreign jurisdictions: PBEs would need to separately disclose reconciling items by nature and by jurisdiction when the individual reconciling items in this category equal or exceed a threshold of 5% of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate.
- Effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items: PBEs would need to separately disclose these reconciling items by nature, based on a quantitative threshold of 5%.
- Enactment of new tax laws
- Valuation allowances
- Changes in unrecognized tax benefits
Any other reconciling item that meets the 5% threshold but does not fall into one of the above categories would have to be disaggregated by nature.
The guidance would be applied retrospectively for all periods presented. The proposal included the following example of a rate 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 proposal would require all entities to disclose the year-to-date amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes on both an interim and annual basis.
All entities would be 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).
State tax disclosure
The proposal would also require entities to provide qualitative disclosures about which states contribute to the majority of the reconciling item for state and local income taxes.
This is one of the more contentious aspects of the proposal because although the existing ASUs never prescribed the use of blended rates, most preparers use a blended rate in practice.
Theoretically, using a blended rate should reach the same result mathematically. However, it sometimes doesn’t due to net operating losses (NOLs), state tax credits, areas where states have decoupled from federal law, etc. Maintaining, supporting, and disclosing the blended rate often becomes more work than simply preparing the calculations without using a blended rate.
How Bloomberg Tax Provision can help
Now is a good time to ensure you have all the right puzzle pieces on the table to provide the rate reconciliation and disaggregated income taxes paid disclosures. The changes mentioned above are just a proposal at this point, so we don’t know what the final ASU will include. Still, there will inevitably be changes to income tax disclosures, and they’re bound to be different from your current processes.
If you’re doing these rate reconciliations in spreadsheets, there will be a lot of work involved in updating formulas, recalculating existing or older provisions for the retrospective presentation, and determining which jurisdictions are greater than or equal to 5%.
The cumbersome part of tax compliance will be making spreadsheets handle layers of calculations that they weren’t designed to do.
On the other hand, if you use a provision software solution like Bloomberg Tax Provision, the information is already there, and your chances of a seamless transition are much higher. You already have the mechanics in place, and the software can deliver the reports you need to prepare the required disclosures.
To learn more about FASB’s proposed changes to income tax disclosures, register for our on-demand webinar, Proposed FASB Changes to Income Tax Disclosures – Are Blended State Rates Over? or request a demo to learn how to save time and ensure accuracy with Bloomberg Tax’s powerful tax provision software.