New financial disclosure requirements from the Financial Accounting Standards Board (FASB) are intended to provide investors with greater transparency into corporate tax practices, but they also present uphill climbs related to data, technology, and internal processes for companies, according to tax and accounting professionals.
The rules, which stem from years of investor feedback requesting more granular tax information, are effective for public business entities for annual periods beginning after December 15, 2024, meaning they will first appear in 2025 financial statements filed in 2026.
Income Tax Disclosures
The amendments in FASB Accounting Standards Update (ASU) No. 2023-09, Improvements to Income Tax Disclosures, are a direct response to investor requests for information to better assess how a company’s global operations, tax risks, and planning strategies affect its tax rate and future cash flows. According to the FASB, investors indicated that existing disclosures were insufficient to understand a company’s exposure to potential changes in jurisdictional tax laws and to accurately forecast cash flows.
Under the new guidance, public business entities must provide a more detailed tabular reconciliation of their effective tax rate to the statutory federal rate, using both percentages and reporting currency amounts. The rule requires disclosure for eight specific categories, including state and local taxes, foreign tax effects, the effect of changes in tax laws, cross-border tax laws, and tax credits.
A critical change is the requirement to disaggregate any individual reconciling item within certain categories that is equal to or greater than 5% of the amount computed by multiplying pre-tax income by the applicable statutory rate. For the foreign tax effects category, this disaggregation must be done by both jurisdiction and nature.
Additionally, companies must provide a qualitative description of the states and local jurisdictions that make up the majority of the effect of the state and local income tax category.
The ASU requires all entities to provide more granular information on income taxes paid. The disclosure must break down the amount of income taxes paid, net of refunds, by federal, state, and foreign jurisdictions. Companies must also separately disclose the income taxes paid to any individual jurisdiction — whether a country, state, or local territory — that is equal to or greater than 5% of total taxes paid.
Overcoming Data and Process Hurdles
According to Michael Williams, income tax provision services (ASC 740) principal and national practice leader at BDO, the new rules have created operational blockers, with data and technology being the biggest challenges for tax departments. “The intent of the FASB was more transparency,” Williams told Checkpoint, adding that early concerns from companies about the increased workload have “really played out.” Many companies, he explained, had to fundamentally revisit their technology and data management processes to comply with the ASU’s granular requirements.
The new rules exposed weaknesses in existing systems, particularly for decentralized companies or those not on a uniform Enterprise Resource Planning system where data was not previously accessible at the required level. Williams noted that many companies lacked the built-in capability to track and report cash tax payments with the visibility now required. “A lot of companies build their own kind of bolt-on tool, he said.” This has led to an increased “financial statement risk if they haven’t properly resourced,” Williams cautioned.
To navigate this, proactive planning and internal communication have been crucial. Williams advises companies to get “out in front of it sooner” by assessing processes, data, and resource constraints early. Success also requires buy-in from other departments. “Companies are going to need business/leadership support to make those types of investments,” he stated, emphasizing the importance of educating the C-suite and board on the demands to secure funding for technology or process automation.
With the new rules leaving some questions open, especially around materiality, Williams noted that companies must make judgments to apply the guidance. “There’s still a lot left to left to interpretation,” he said.
Pillar Two and Country-by-Country Reporting
The new FASB rules arrive as multinational enterprises are also grappling with a wave of global transparency initiatives, most notably the OECD’s Pillar Two global minimum tax and public Country-by-Country Reporting (CbCR) mandates in jurisdictions like the European Union and Australia. These overlapping requirements are creating layers of complexity and stretching corporate tax resources thin.
Matt Williams, a principal in BDO’s Specialized Tax Services group, commented to Checkpoint that public CbCR rules raise several concerns for businesses, including the “disclosure of sensitive financial data,” especially for private companies. He also pointed to a lack of “uniformity of application in the EU” and the risk of “additional scrutiny from stakeholders” who may misinterpret the data. “The CbCR data … is a limited view of a large MNEs global financial results, which are often complex and often does not present an accurate representation of the business,” he wrote. “This may lead to misinterpretation and challenge from a number of interested parties without full visibility or understanding of the underlying data.”
Meanwhile, the Pillar Two Global Anti-Base Erosion rules require companies to constantly track legislative developments in every country where they operate. According to Matt Williams, this creates a “significant additional cost and/or resource constraint particularly as the legislative process in each jurisdiction differs and the changes are being enacted piecemeal throughout the year.” Companies must monitor not only the adoption of the rules but also any local deviations from the OECD’s model, such as Bulgaria’s unique calculation for its substance-based income exclusion.
This complex, shifting landscape adds another layer of reporting and data management challenges on top of the new ASU requirements, forcing companies to adopt new strategies. “The more common approach is a co-sourcing or outsourcing model given constraints on resources, budget and the complexity of the business,” he explained.
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