Don’t Wait Until the Last Minute to Adopt FASB’s Income Tax Disclosure Rules, Some Caution

The FASB’s income tax disclosure rules take effect next year, but companies should not wait until the last minute to plan their adoption process as many have done in the past. Don’t wait because the requirements go substantially beyond tax returns filed with the IRS, accounting practitioners said.

“It actually requires quite detailed information about US and foreign tax, etc.” Iris Chan, accounting advisory partner, at CrossCountry Consulting, said on February 12, 2024. “Many companies’ income tax disclosures are already very long – this additional requirement is going to definitely add to it, especially with challenges companies have with income tax reporting already,” she said. “This standard requires even more information and companies are going to need time to prepare for it.”

The FASB issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740): Improvements To Income Tax Disclosures last year, to increase the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay. The guidance was developed so that users of financial statements can get better information about how the operations, related tax risks, tax planning, and operational opportunities of companies affect their tax rates and prospects for future cash flows.

For public companies, the standard is effective for annual periods beginning after December 15, 2024 (i.e. on January 1, 2025, for calendar year-end filers), and a year later for private companies. Early adoption is permitted.

“It’s one you really want to get in front of and make sure you know what you need to disclose,” said Chan. “Start gathering the information early on, establish the proper process and controls to gather the information required so you can get the right data and analysis timely is going to be key to the adoption.”

The standard is hitting at a time when companies are concerned about the cost of change and a slimmer pool of accounting talent and thus have placed it on the worry list.

“It will increase costs for companies,” said Rich Brady, IMA’s (Institute of Management Accountants’) Global Board Chair and CEO of the American Society of Military Comptrollers (ASMC). “It particularly requires companies to maintain four sets of books – US GAAP, US tax, the international ledger, and now OECD Pillar Two as well,” he said. “And so, you’re increasing the level of complexity, you’re increasing the level of compliance,” he said.

Brady said that companies are trying to comply on time with these standards, while trying to reduce costs as much as they can, but it’s very much a challenge. “If you look at it from the broad picture, the totality of all of these pronouncements from the various rules-based making bodies are at a time when there’s almost a perfect storm with the management and talent pipeline challenges, creating a very untenable situation for many companies,” he said. “The large companies have a lot more reserves, a lot of bandwidth — they will have the ability to get in front of a lot of these and comply on time. A lot of the small to midsize companies, which are represented within the Institute of Management Accountants, have a more difficult time.”

Under the standard, companies need to disclose the following eight categories in the rate reconciliation table by both percentages and amounts:

• State and local income tax in the country of domicile, net of federal income tax effect
• Foreign tax effects, including any state or local taxes in foreign jurisdictions
• Enactment of new tax laws
• Effect of cross-border tax laws
• Tax credits
• Valuation allowances
• Nontaxable or nondeductible items
• Changes in unrecognized tax benefits

Further, within the foreign tax effects category, a further breakdown is required for individual reconciling items that meet or exceed a 5% threshold for the effects of cross-border tax laws, tax credits, and nontaxable or nondeductible items.

Annually, companies need to disclose income taxes paid, net of refunds, by jurisdiction, if the amounts equal or exceed a quantitative threshold of 5% of total income taxes paid, net of refunds.