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FASB Unanimously Votes to Finalize Proposed Disclosure Rules on Income Taxes

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB on Aug. 30, 2023, unanimously voted to finalize proposed disclosure rules on income taxes, touting the benefits to investors toward understanding the changes in tax legislation and global tax risk of businesses.

After more than three grueling hours hammering through dozens of issues, the board affirmed the most significant aspects of Proposed Accounting Standards Update (ASU) No. 2023-ED100 Income Taxes (Topic 740) Improvements to Income Tax Disclosures, which was issued last year to improve disclosure rules around the rate reconciliation table and cash taxes that companies pay both in the U.S. and in foreign jurisdictions.

Public companies will be required to report under the new guidance for the fiscal years beginning after Dec. 15, 2024 – in other words, starting from 2025 for a calendar year public company. Interim reporting will be required for the following fiscal years, i.e., starting from the first quarter of 2026. The standard takes effect one year later for privately held companies. But both public and private companies will have the option to adopt the guidance early.

In general, board members expressed satisfaction with passing the rules, stressing the changes are important to those who make investments in the U.S. capital marketplace.

“We’re read all the comment letters,” FASB Chair Richard Jones said. “We went through those trying to make sure we had something operational and then we were focused on providing that most relevant information to those allocators of capital while being mindful of the cost that is borne to provide that information and I think we have the right balance here,” he said. “It has to be unbiased information, meaning we’re not trying to direct an outcome, that means it’s going to be used by investors in two ways, one is that they can make their own judgements and evaluation of what a tax rate is that makes sense for that entity for them to use in their models going forward in their projections of cash flows but two also as a way to actually challenge companies, are they doing their best to maximize returns to investors through appropriate operation and structure.”

Doesn’t Require Country-by-Country Disclosures

A key point flagged was that the provisions will not require country-by-country disclosures as some feared—a misunderstanding of the proposal.

Under the guidance, companies will be required to provide a breakout of amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than a lump sum amount. Further, 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.

“I think it is important to recognize that we’re focused on the investment community who are making decisions on capital allocation,” FASB member and analyst Frederick Cannon said. “I had mentioned in a number of board meetings that today because of aggregation along different areas, there’s a blind spot for users in terms of the risks and opportunities through changes in tax codes and the inability to get a good view of the future especially when relative to tax with the one exception of the U.S. federal rate which is analyzable, but now we’ve greatly enhanced that so I believe the benefits to the investment community are significant; I believe this is very focused on the investor who is making investment decisions and capital allocation,” he said. “We do recognize the cost to preparers, but I do think overall the cost with this approach the benefits significantly outweigh the costs.”

All seven FASB members affirmed that the benefits of the changes will exceed the costs, including those who were hesitant in prior discussions.

“I believe that the expected benefits will exceed the cost,” Vice Chair James Kroeker said. “I’m actually very pleased this time to support it – while I didn’t dissent to prior [exposure draft] on this – I did express significant concern that we weren’t really helping investors understand what they said was an opaque area, some described it as a black box and I think prior iterations of this were attempting to give some of the information that was an input to the box without ever explaining the output. I argued from the outset that we should take a top down approach focusing on the rate reconciliation so I’m very glad that we’ve done that.

Extensive Outreach Done with Investors

The proposal garnered legislative pushback a few weeks ago – adding some controversy – but extensive outreach revealed investors broadly supported the project and the proposal.

Specifically, the board and staff met with 54 investors through 83 interactions, including 37 individual discussions, 35 interactions during 8 advisory group public meetings, and 11 public comment letters since 2020 to understand their requests for more transparent income tax information in the financial statements, according to meeting papers.

Ultimately the rules passed because investors pressed to get them, the discussions indicated.

“I do think it’s been an interesting journey for this project and certainly I think that our agenda invitation-to-comment helped us to really reframe this project in 2022 and I think from that perspective we’re really focused on making these very targeted improvements that investors and other allocators of capital have asked us for and where they were specifically lacking information,” FASB member Susan Cosper said. “I’ve said it many times before, the rate reconciliation is a very, very powerful disclosure, sometimes underutilized and so I hope some of the changes and improvements in disaggregated information will help to drive some consistency and some comparability.”

 

This article originally appeared in the August 31, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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