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FASB

FASB Proposal Coming Early Next Year to Require Greater Disclosure of Income Taxes Paid in U.S., Overseas

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB on Nov. 30, 2022, voted to issue a proposal during next year’s first quarter that would require companies to provide greater insight into income taxes they pay in the U.S. and in foreign countries, for both interim and annual reports. If finalized, new rules will be issued later in 2023, according to the discussions.

The board plans to propose that companies should break down the income taxes they paid to federal, state and foreign authorities in a reporting period, detailing where they paid more than 5 percent of total taxes and the dollar amount. Companies would provide the disclosures by federal, state and foreign for both annual and interim reporting, and annually by individual jurisdiction.

“I think the board has come a long way on this project over the years that we have been working on it,” FASB member and academic Christine Botosan said. “Nobody’s going to be completely happy…I think where we’ve ended up though is that everybody is going to get some things that they felt were very important to be satisfied and that gives me comfort that we’ve probably struck a reasonable balance between cost and benefit.”

The jurisdictional disclosures would fall under Topic 740Income Taxes, and would include rate reconciliation information by specific categories, according to the discussions. The guidance would shed light on the impacts of taxes on profits, including risks and opportunities both here and overseas. Further, the disclosures would provide investors with better information for making investment decisions, estimating tax rate risks, determining tax rate sustainability, forecasting future cash flows, and asking appropriate and efficient questions to management.

“I believe this is a major step forward for users – jurisdictional information is essentially a blind spot for users,” FASB member and analyst Frederick Cannon said. “I think this alleviates that blind spot – so the benefits to the user community and investors is very significant, recognizing that there will be a cost imposed on preparers but I think the benefits outweigh the costs.”

Much of the work for financial statement preparers would surround the time and effort needed to gather the disaggregated information on various occasions, board discussions revealed. But the information would not be tough to get because companies have systems in place that could gather the required data.

The proposal could be issued as early as late February, according to the discussions. Companies will get 75 days to submit comments.

Nitty Gritty Rules about Cash Taxes Paid

Specifically, among disclosures the board voted to require would include:

  • Income taxes paid disaggregated between federal, state, and foreign, and do so on the basis of a quantitative threshold of 5 percent;
  • The tax effect of the following specific categories, at a minimum, in the rate reconciliation table (centralized in the state and local income tax category and the tax effects of foreign operations would be centralized in the foreign tax effects category): (1)  State and local income tax, net of federal income tax effect; (2)  Foreign tax effects; (3)  Enactment of new tax laws; (4)  Effect of cross-border tax laws; (5)  Tax credits; (6)  Valuation allowances; (7)  Nontaxable or nondeductible items; (8)  Changes in reserves for tax positions.
  • Applying the quantitative threshold of 5 percent of the amount computed by multiplying pretax income by the applicable statutory income tax rate, an entity should disclose: (1)  within cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, the reconciling item by nature within each category, identified on the basis of the quantitative threshold;   (2)  within the foreign tax effects category, the reconciling item by nature and by jurisdiction, identified on the basis of the quantitative threshold. The quantitative threshold would be assessed by the gross tax effect of a component of the same nature within one foreign jurisdiction, rather than the net tax effect that is offset by the component of different nature within the same jurisdiction or by the component of the same nature within other foreign jurisdictions; and (3)  for other reconciling items that do not fall within the specific categories, the reconciling item by nature, identified on the basis of the quantitative threshold.
  • Relevant accompanying qualitative disclosures for the rate reconciliation information subject to the existing disclosure requirements and the potential improvements (such as adding a disclosure objective on how the rate reconciliation is intended to address users’ needs and clarifying how significant reconciling items should be disclosed).

Retrospective transition should be required for all income tax disclosures, the board agreed. This means that a company would be required to apply the income tax disclosures for all periods presented for comparative purposes.

 

This article originally appeared in the December 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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