What Will the FASB's New Disclosure Rules Mean for Your Company?
The Financial Accounting Standards Board (“FASB” or “the Board”) is issuing Accounting Standard Update (“ASU”) 2023-09. The amendments in this ASU apply to all entities that are subject to Topic 740, Income Taxes, and are set to take effect in 2025 for public business entities, and in 2026 for entities other than public business entities. These standards bring about a noteworthy shift in how domestic and global companies disclose their tax information.
The proposed ASU aims to enhance the transparency and usefulness of annual and interim income tax disclosures. Various stakeholders have expressed the need for improved income tax disclosures to better understand how an entity's operations in multiple jurisdictions, as well as related tax risks, planning, and operational opportunities, impact its tax rate and future cash flows.
The enhancements primarily centered on income tax information, specifically income taxes paid and the rate reconciliation. Entities will be obligated to provide more comprehensive details to reconcile their statutory tax rate with their effective tax rate. This ASU also includes certain other amendments to improve the effectiveness of income tax disclosures. Certain of the disclosures that are required by the ASU are not required for entities other than public business entities.
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Rate Reconciliation Disclosure
The amendments in this ASU require that public business entities disclose a tabular reconciliation, in accordance with certain requirements, for the following specific categories:
- State and local income tax, net of federal (national) income tax
- Foreign tax effects
- Effect of Newly Enacted Tax Laws
- Effect of cross-border tax laws
- Tax credits
- Changes in valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits.
The Board has emphasized that entities are required to use a 5% threshold. The threshold is calculated by multiplying the income (or loss) from continuing operations before tax by the applicable statutory income tax rate. This is necessary for a more detailed breakdown of the reconciling items.
For entities other than public business entities, the amendments require qualitative disclosure about specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rat
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Additional ASUs’ Updates Issued During 2023
In addition to the amendments included in ASU 2023-09, the FASB has issued several ASUs during 2023. Below is a summary of these:
ASU 2023-08 – Intangibles – Goodwill and Other – Crypto Assets (December 2023)
- Accounting for and Disclosure of Crypto Assets (Subtopic 350-60): This update, which will be effective for fiscal years beginning after December 15, 2024, requires a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which an entity adopts the amendments. This development acknowledges the increasing significance of cryptocurrencies and aims to promote uniformity and transparency in financial reporting within this domain.
ASU 2023-07 – Segment Reporting (November 2023)
- Improvements to Reportable Segment Disclosures (Topic 280): This update applies to all public entities that are required to report segment information in accordance with Topic 280 and will take effect for fiscal years beginning after December 15, 2023. Among other things, this ASU mandates public companies to disclose noteworthy expenses regularly provided to the chief operating decision maker (CODM) and included in segment profit or loss. The objective is to offer investors a clearer understanding of how management evaluates and oversees various segments.
ASU 2023-05 – Business Combinations – Joint Venture Formations (August 2023)
- Recognition and Initial Measurement (Subtopic 805-60): This update, which will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025, addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The objectives of the amendments are to (1) provide decision-useful information to investors and other allocators of capital in a joint venture’s financial statements and (2) reduce diversity in the practice.
ASU 2023-02 – Investments – Equity Method and Joint Ventures (March 2023)
- Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (Topic 323): This update, which will be effective for public business entities for fiscal years beginning after December 15, 2023, and for all other entities for fiscal years beginning after December 15, 2024, introduces the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, the amendments in that ASU limited the proportional amortization method to investments in low-income housing tax credit structures.
ASU 2023-01 – Leases (March 2023)
- Common Control Arrangements (Topic 842): This update, which is effective for fiscal years beginning after December 15, 2023, provides a practical expedient for private companies and not-for-profit entities that are not conduit bond obligators to use the written terms and conditions of a common control arrangement to determine: (1) whether a lease exists and, if so, (2) the classification of and accounting for that lease. This update also amends the accounting for leasehold improvements associated with common control leases. Under this update, leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease. Additionally, it needs to be accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset.
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All these changes will enhance the transparency and usefulness of annual and interim income tax disclosures, improving understanding of an entity's tax rate and future cash flows. Key enhancements include requiring entities to provide comprehensive details to reconcile their statutory tax rate with their effective tax rate. Public business entities will need to disclose a tabular reconciliation for specific categories. Compliance with these changes is crucial for companies navigating the evolving landscape of tax disclosures.
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