The FASB on May 11, 2022, said it would research whether to require companies to disclose the top jurisdictions in which they pay the most income taxes.
The board will also research improvements to the tax rate reconciliation table, a tool that can help with the understanding of future cash flows when there are changes in tax laws, according to the discussions.
No rulemaking decisions were made.
Staff will research two alternatives: disclosure of income taxes paid to states and countries, such as top 5, top 10, or any other number, on the basis of the amount of income taxes it paid to each jurisdiction during a reporting period; disclosure of the amount of income taxes paid for each of the jurisdictions identified on the basis of a quantitative threshold.
“I think [a jurisdictional approach] is really the only viable alternative,” FASB member Marsha Hunt said. “That’s the auditable way to go,” she said. “An entity is actually transferring cash somewhere. So you know who you paid, you know how much you paid.”
Especially important are disclosures for taxes paid in foreign countries as there is less transparency, some board members said.
“To me this is a really important issue,” FASB member Gary Buesser said. “If you look at it by jurisdiction, U.S. federal clearly is important; the states one line item for me is fine, [but] it’s really the foreign jurisdictions that are important here,” he said.
Under current U.S. GAAP, income taxes paid is provided as an aggregated number that is compiled under the current disclosure requirements of Topic 230, Statement of Cash Flows. Financial statement users have asked the board to require information of cash taxes paid at a more granular level such as by jurisdiction or geographic segment or by types of taxes paid such as the base erosion and anti-abuse tax (BEAT) or the global intangible low-taxed income (GILTI), a staff member explained to the board. Furthermore, users suggested disaggregating income taxes paid between current and prior tax seasons.
“The test on whether we’re making progress is whether the disclosure that we’re going to create is going to allow them to assess risk and opportunities from changes in foreign tax policy in particular and state policy secondarily,” FASB member Fred Cannon said.
The board also discussed potential approaches that would improve the rate reconciliation table, another area users flagged as needing more detailed and consistent information especially related to the foreign tax rate differential.
Board members favored an approach that would establish a quantitative threshold with any reconciling item greater than that threshold needing to be separately disclosed in the rate reconciliation. The threshold would be aligned with existing SEC guidance.
Standardizing the rate reconciliation information would drive consistency in financial reporting and help with comparisons of companies that may have different operational structures but are in the same industry, board members said.
Under current GAAP, public companies are required to disclose a rate reconciliation from the statutory rate tax to the effective tax, whereas private companies are only required to disclose the nature of significant reconciliation items.
Additionally, all companies are required to disclose the nature and effect of any other significant matters affecting comparability of information for all periods presented if it is not disclosed elsewhere.
Furthermore, SEC guidance requires disaggregation of reconciling items based on five percent of the amount computed by multiplying pre-tax income by the applicable statute or income tax rate.
This article originally appeared in the May 13, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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