The FASB on March 15, 2023, proposed a package of income tax disclosure rules that will require companies to provide more transparency about their exposure to changes in tax legislation and the global tax risk they may face.
The rules were developed to address concerns that current income tax disclosures do not provide investors with sufficient information to understand the tax provision for a company that operates in multiple jurisdictions, the board said.
The most significant items proposed are changes to disclosures related to amounts paid for tax and the rate reconciliation. If finalized, companies will be required to break out amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than just disclosing a lump sum amount. Similarly, the rate reconciliation will require disaggregation into eight specific categories, with these categories further disaggregated by jurisdiction and for amounts exceeding 5 percent of their domestic tax rate. The rate reconciliation will need to also disclose both dollar amounts and percentages—currently it is either/or.
Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities, according to the proposal.
Overall, the provisions will not be costly to apply as the information is already available in filings with the Internal Revenue Service (IRS), practitioners said.
“The information should already be available to companies for their own tax compliance for their filings of their tax returns,” Ro Sokhi, partner at UHY LLP, and managing director at UHY Advisors, said. “However, because this information would need to be included in the SEC filings on a disaggregated basis, they’ll have to evaluate the internal controls around financial reporting for the information that is being included,” he said. “That includes, where is this information coming from, what are the systems involved, are there general IT controls that management has in place, and if not, does management need to bolster these controls.”
Companies have until May 30 to submit comments on the guidance, which was issued as Proposed Accounting Standards Update (ASU) No. 2023-ED100, Income Taxes (Topic 740) Improvements to Income Tax Disclosures.
The guidance will be required to be applied retrospectively, the board said.
“We encourage all stakeholders to review and share their views on the proposed changes and whether they believe those proposed changes would improve this important area of financial reporting,” FASB Chair Richard Jones said in a statement.
Bolstering the Rate Reconciliation Table
The enhancements to the current rate reconciliation table will enable investors to better assess a company’s worldwide operations, related tax risks, tax planning, and operational opportunities that affect its tax rate and prospects for future cash flows, the proposal states.
Specifically, public companies will need to disclose a tabular reconciliation, using both percentages and reporting currency amounts, by the following categories:
- State and local income tax, net of federal (national) income tax effect;
- Foreign tax effects;
- Enactment of new tax laws;
- Effect of cross-border tax laws;
- Tax credits;
- Valuation allowances;
- Nontaxable or nondeductible items;
- Changes in unrecognized tax benefits.
Companies would also separately disclose any reconciling item listed below in which the effect of the reconciling item is equal to or greater than 5 percent of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate:
- If the reconciling item is within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, it must be disaggregated by nature; If the reconciling item does not fall within any of the categories, it must be disaggregated by nature.
- If the reconciling item is within the foreign tax effects category, it must be disaggregated by jurisdiction (country) and by nature.
To categorize reconciling items, the state and local income tax category would reflect income taxes imposed at the state or local level within the jurisdiction (country) of domicile, the foreign tax effects category would reflect income taxes imposed by foreign jurisdictions, and the remaining categories would reflect federal (national) income taxes imposed by the jurisdiction (country) of domicile, the proposal states.
Additionally, for the state and local category, a public company would provide a qualitative description of the state and local jurisdictions that contribute to the majority of the effect of the state and local income tax category. The company would provide an explanation, if not otherwise evident, of the individual reconciling items disclosed, such as the nature, effect, and significant year-over-year changes of the reconciling items.
Moreover, on an interim basis, public companies would provide a description of any reconciling items that result in significant changes in the estimated annual effective tax rate from the effective tax rate of the prior annual reporting period, among other requirements.
Private companies would be required to provide qualitative disclosure about specific categories of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.
Other Disclosures
The proposal also includes aspects of the 2019 revised Proposed ASU No. 2019-500, Income Taxes (Topic 740): Disclosure Framework—Changes to the Disclosure Requirements for Income Taxes , to improve the effectiveness of income tax disclosures.
The board proposes to add disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with SEC Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense; and remove disclosures that no longer are considered cost beneficial or relevant.
This article originally appeared in the March 16, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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