In 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The purpose of the ASU is to enhance the transparency and usefulness of income tax disclosures, primarily focused on two main areas: rate reconciliation and income taxes paid. This update requires companies to change how they report their income tax provision under ASC 740. For public companies, the new disclosure requirements are effective for tax years beginning after December 15, 2024. This article addresses the implications and what corporate tax professionals need to know in order to accurately complete related disclosure requirements under the new ASU 2023-09.
The key updates in the FASB income tax disclosure requirements include enhanced transparency and detailed reporting. These updates necessitate more comprehensive disclosures about effective tax rates and cash income taxes paid, requiring significant effort from tax departments.
The key changes include enhanced disclosures around rate reconciliations and income taxes paid, as well as a new requirement for disaggregation of income taxes accounted for in federal, state, and foreign taxes.
Another significant update is the introduction of qualitative disclosures about states contributing to the majority of state tax expense. These updates aim to provide better information for assessing tax risks and opportunities, enhancing the clarity and utility of financial statements.
Complying With the Updates
We recommend that businesses take several steps to ensure compliance with the updated FASB standards.
First, understand the changes. Familiarize yourself with the updates introduced by FASB ASU 2023-09, which focus on enhancing transparency related to income tax disclosures, particularly in rate reconciliation and income taxes paid.
Next, prepare for implementation. Start preparing your provision process early to avoid being overwhelmed by the changes. This includes updating your systems and processes to handle the new disclosure requirements effectively.
Consider using technology. Advanced tax provision software can automate complex calculations, present rate reconciliation in both dollars and percentages, and disaggregate rate reconciliation data.
Next, review and update spreadsheets. If you use spreadsheets, ensure they are updated to handle the new requirements, including breaking out details needed for presentation and determining jurisdictional thresholds.
Last, track and report accurately. Ensure accurate tracking and reporting of state-specific tax expenses, net operating losses, credit carryforwards, and income tax payments. Additionally, generate audit-ready reports. Use tools that can generate Excel-based, audit-ready reports that facilitate review and grouping functions.
How can tax professionals be confident about managing the FASB updates? With the complexities of new reporting standards and increased scrutiny on tax disclosures, tax professionals need technology that meets regulatory requirements and integrates into the organization’s broader financial technology stack.
Advanced software allows users to manage controls and efficiencies better than in Excel, streamlining the reporting process by automating calculations and reducing errors. By leveraging technology and optimizing processes, tax professionals can ensure accurate and compliant financial reporting.
Tax Reporting Ramifications
What do these changes mean for tax reporting overall? The changes introduced by FASB ASU 2023-09 have significant implications for tax reporting more broadly. They require companies to enhance the transparency and detail of their income tax disclosures, focusing on effective tax rates and cash income taxes paid. We’ve seen agencies require more disclosure of data, and we expect that this will only increase.
This shift is driven by global concerns over corporate tax fairness and initiatives like the Organisation for Economic Co-operation and Development’s global minimum tax rate. As a result, corporate tax departments will need to adapt their processes, integrate new technologies, and ensure compliance with these updated requirements. The changes also necessitate updates to reporting systems to accommodate detailed rate reconciliation and disaggregated income taxes paid disclosures. Overall, these updates aim to improve the accuracy and transparency of tax disclosures, which are important to investors, ESG advocates, and other stakeholders interested in tax equity and corporate responsibility.
Preparing for Future Reporting Changes
What can tax departments do to prepare for additional changes in tax reporting requirements? Changes in tax reporting requirements provide an opportunity for the tax department to have an impact on the broader company. To prepare for changes in tax reporting, tax departments should focus on being more flexible. This involves implementing agile processes that can quickly adapt to new tax laws and changes in the business environment. Using automation through advanced software solutions is crucial. These tools help streamline the tax provision process, reduce the risk of errors, and free up tax professionals to concentrate on complex decision-making and risk management. By adopting a proactive and flexible approach, tax departments can manage financial risks more effectively and ensure compliance with evolving tax regulations in a timely manner.
Frances Alonso is Bloomberg Tax & Accounting’s director of product management.
