Technology Solutions for FASB ASU 2023-09 Compliance
By Frances Alonso and Darian Harnish
One of the biggest challenges facing corporate tax departments – and specifically provision professionals – is compliance with the Financial Accounting Standards Board’s updated requirements on income tax disclosures.
Accounting Standards Update 2023-09, issued by FASB in 2023, dramatically impacts income tax disclosures with several changes intended to address investor calls for more information about income taxes. The standard requires that companies provide detailed reporting and transparency around effective tax rates and cash income taxes paid.
With these changes, FASB aims to “allow investors to better assess, in their capital allocation decisions, how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows.”
The increased scrutiny on disclosures also stems from a broader effort concerned with tax fairness. The global focus on corporate taxation, particularly following the Organisation for Economic Co-operation and Development’s (OECD) efforts to implement a global minimum tax rate of 15%, reflects concerns that companies are not paying their “fair share” of taxes. The goal of this initiative is to prevent a race to the bottom, where countries compete to offer the lowest tax rates – often at the expense of fairness and equity in the global tax system.
Activist investors, ESG advocates, and other financial statement users are also interested in understanding the geographical distribution of tax liabilities and ensuring corporations contribute fairly across the jurisdictions in which they operate.
The ASU 2023-09 changes will require significant additional time and resources, and corporate tax departments need time to integrate the new standard into their processes. The updated standard is effective for public business entities for annual periods beginning after Dec. 15, 2024, and effective for all other business entities one year later.
Early modeling of the changes and implementation of tax technology is critical for compliance without compromising efficiency.
Compliance challenges for corporate tax departments
Adopting the new standard will require more work and presents several challenges for corporate tax departments.
One key issue is the timing of the footnote disclosures. Corporate tax departments often save footnote disclosures for last in a provisioning process, but disclosures will take more time under the new standard. Delays place additional pressure on chief accounting officers and controllers, who are keen to finalize financial statements quickly and accurately.
The organization must first decide whether to adopt the ASU prospectively (the default method) or retrospectively. While the prospective method may seem more straightforward, some financial reporting managers are considering the retrospective approach because otherwise, the footnotes require two rate reconciliation tables – one for the prior years that do not contain the same level of detail under the new standard and one for the current year.
Retrospective adoption complicates financial reporting and makes the footnotes more cumbersome to prepare because it requires revisiting prior-year provisions, and the preparer may not be as familiar with the data as they were during the initial preparation.
Resource strains on tax departments
Resource constraints within tax departments are another hurdle to compliance. Many tax departments rely on manual processes and outdated systems, which present challenges in addressing the reporting requirements.
Coupled with C-suite expectations for more real-time data, such as modeling the potential impacts of proposed tax law changes, demands for detailed, transparent tax disclosures place pressure on tax teams already stretched thin.
For these reasons, tax departments must look for opportunities to optimize processes and leverage technology to manage the complexities of complying with ASU 2023-09.
How technology helps corporate tax departments prepare
Tax provision technology alleviates many challenges associated with adapting to ASU 2023-09, especially in a resource-constrained environment. By automating essential tasks, integrating data systems, and enhancing reporting capabilities, corporate tax departments are better prepared for compliance.
Here’s how technology supports your corporate tax department.
Automation and accuracy
One immediate benefit of tax technology is automating manual processes to reduce errors and improve efficiency.
Tax professionals traditionally spend considerable time reconciling differences in rate reconciliation (rate rec) tables and addressing issues such as outdated formulas from previous years. Automating these steps and starting with a balanced provision that generates an effective tax rate consistently avoids the tedium of troubleshooting discrepancies.
Automation also prevents common issues such as a new temporary adjustment inadvertently breaking an Excel model. In many cases, team members don’t detect this type of error until the rate reconciliation process is well underway, requiring last-minute corrections and unnecessary delays.
Data integration and centralization
Another advantage of tax technology is centralizing data, providing tax departments with real-time access to critical information and better control over their reporting. Many corporate tax departments struggle to integrate foreign jurisdiction provisions into the final provision deliverables. Companies often report foreign cash tax payments or permanent items in summary, requiring tax professionals to go back through local provisions to extract the necessary data for disclosure. A centralized system eliminates the need for this time-consuming work.
Centralization also provides tax teams with greater visibility into their global tax footprint. Companies can monitor foreign provisions, cash tax payments, and other elements in real time to streamline compliance and improve the accuracy of disclosures.
Improved reporting and compliance
Tax departments may struggle with consistent reporting in rate reconciling items for several reasons.
First, employees may not categorize items consistently from year to year simply because they don’t recall where they included something such as unrecognized tax benefits.
Another challenge is effective tax rate reconciliations. Reconciling items with a tax effect greater than 5% of income from continuing operations must be separately disclosed. ASU 2023-09 requires additional disaggregation of items that companies have historically aggregated, increasing the number of items that may rise above the 5% threshold. However, the items that rise above that 5% threshold can change from year to year.
Software standardizes reporting practices to ensure the tax department handles adjustments consistently across reporting periods. This simplifies compliance and supports more accurate reporting.
Reduced risk
Certain tax technology solutions reduce the risk of errors by automatically updating with the latest tax rates for each jurisdiction. This is particularly valuable when preparing for audits, as the system provides transparent, well-organized reports that auditors can easily follow.
Preparers spend less time walking auditors through tax provision workpapers and explaining the relationships among various Excel calculations.
Advanced features of provision software for FASB compliance
Tax provision software offers several features to streamline compliance and improve efficiency, accuracy, consistency, and audit readiness. Below are some of the capabilities modern provision software provides to help organizations comply with ASU 2023-09.
Real-time updates
One advantage of using provision software is staying up to date with the latest tax laws and rates. This is particularly critical given the frequent changes in tax legislation at the federal, state, and local levels. Advanced provision software automatically updates with the latest tax laws and rate changes to reflect the most current data in tax provisions.
Additionally, tax teams can run multiple versions of the provision and compare the data sets to identify the effects of late-adjusting journal entries. Alternatively, they could model the potential effects of proposed tax law changes on the provision and compare to their current model.
Simplified rate reconciliation preparation
The rate reconciliation is one of the most time-consuming aspects of the provisioning process, but tax provision software simplifies this step. Software that automatically stays in balance can generate a detailed rate reconciliation that agrees with the total income tax expense calculated.
Provision software also simplifies the reconciliation process by identifying material impacts on the overall provision. Tax departments can quickly spot and address significant adjustments or changes. Software solutions with integrated accounting for the payable and unrecognized tax benefits ensure that all components of the provision are included in the software, thus avoiding the need to further modify a system-generated rate reconciliation. This saves time and minimizes the risk of manual errors, such as misclassifying items or failing to update formulas.
Audit-ready reports
Preparing for an audit requires detailed and transparent documentation of tax provisions. Provision software can generate audit-ready Excel reports that include all necessary formulas. This capability provides auditors with all the information they need to understand how calculations were made and how elements of the provision relate to one another.
Audit-ready reports help avoid delays and complications during the audit process, as auditors can access well-organized, comprehensive documentation that ties all elements of the provision together. It also makes it easier to provide auditors with comparative reporting if there are multiple versions of the provision.
Choosing the right tax technology for your organization
With the complexities of new reporting standards and increased scrutiny on tax disclosures, you need a solution that meets regulatory requirements and integrates into your organization’s broader financial technology stack. Below are the key factors to consider when choosing a tax provision solution.
Internal controls
One of the most important – yet often overlooked – considerations when adopting new tax technology is its impact on internal controls. Complying with ASU 2023-09 likely requires changes in the company’s internal controls to ensure that data is readily available and that review processes consider the additional income tax disclosures. Most software solutions provide SOC 1 reports to their customers.
Internal controls should be built into your tax provisioning solution to prevent errors, detect inconsistencies, and ensure compliance. This includes establishing checkpoints for data validation, giving appropriate personnel access to the necessary information, and setting up reviews for rate reconciliations and provision adjustments. Integrating strong internal controls reduces the risk of errors and noncompliance while improving the efficiency of tax reporting.
Scalability and flexibility
Another crucial consideration is whether the chosen software is scalable and flexible enough to accommodate your organization’s evolving needs. As businesses grow or experience changes in their tax obligations – such as entering new jurisdictions or expanding their operations – the tax technology must be able to handle increased complexity without requiring a complete overhaul.
Scalability ensures that the system can support a growing number of users, transactions, and jurisdictions. A flexible system is easy to update as new requirements emerge.
Integration with other systems
Effective tax technology must integrate seamlessly with your existing financial reporting systems. The tax software should communicate with enterprise resource planning (ERP) platforms and other systems. Integration reduces the need for manual data entry, minimizes the risk of errors, and allows for real-time data sharing across departments.
For example, when preparing for ASU 2023-09 compliance, your tax provision solution can pull data directly from other systems used in the provision process, ensuring that all relevant information – such as foreign jurisdiction taxes, cash payments, and permanent items – is automatically included in the final provision.
Vendor reputation and customer support
Vendor reputation and customer support are critical when choosing any technology. Work with a provider with a track record of delivering compliant and reliable tax solutions. Evaluate the vendor’s experience in the industry, customer reviews, and the stability of the technology they offer.
Strong customer support is also essential, especially during the implementation phase. Selecting a vendor that provides ongoing assistance, clear documentation, and responsive service when issues arise makes a big difference in the success of the implementation.
Implementation ease
Another factor to consider is the ease of implementation. Your chosen technology shouldn’t disrupt your regular workflows. You need a system that can be implemented with minimal downtime so the tax department can maintain operations while transitioning to the new technology.
An intuitive user interface ensures the system is easy to use once implemented. The provision model should be straightforward, with inputs that mirror the existing tax provision processes, making it easier for tax teams to adopt the software without extensive training. While some training is always necessary, the goal is to choose a solution where the inputs resemble a provision model, making it easier for users to transition and use the system effectively with fewer hours of training.
Simplify preparations with support from Bloomberg Tax Provision and RSM
We are seeing many companies deciding to take the retrospective approach, at least internally as an initial approach. This involves getting three years of financials on the same basis by the time they need to report under ASU 2023-09 in early calendar year 2026, giving them more time to assess how the new rules apply to their specific provision facts.
As companies prepare, a combination of software that will support the new requirement and an advisor to counsel them and ensure compliance is critical.
For example, RSM has been actively working with clients to break out 2023 year-end financials and show decision-makers what their rate reconciliations and footnotes will look like under the new rules.
Bloomberg Tax Provision reports that map all provision points to the new effective tax rate format required under ASU 2023-09 provide a foundation for internal discussions among tax and financial reporting and other key stakeholders.
Request a demo to learn how to save time and ensure accuracy with Bloomberg Tax’s powerful tax provision software.
About the authors
Frances Alonso is a product lead at Bloomberg Tax. Her diverse tax provision background at both Big Four and Fortune 500 companies has given her deep insight on the issues faced by corporate tax practitioners. She believes that technology is the future, and she is driven to deliver value for clients in the provision software space.
Darian Harnish is a senior manager in the Washington National Tax office of RSM US LLP. He works diligently to tackle complex challenges in accounting for income taxes under ASC 740. Darian assists client teams in determining the appropriate treatment of complex or unusual transactions at the nexus of financial reporting and tax law. He also monitors changes in tax law and accounting guidance for implications for RSM clients. He serves a variety of clients across industries, including private equity portfolio companies, companies considering a go-public transaction, and middle-market publicly traded corporations.