ASU 2023-09 updates ASC 740 to improve transparency in income tax disclosures, focusing on tax exposures and cash flow insights. Key changes include expanded rate reconciliation, disaggregated tax payments, and new reporting requirements for public and non-public entities.
By Lindsay Haskell and Lauren Staub
In December, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-09 (ASU 2023-09), introducing significant changes to income tax footnote disclosures for entities subject to ASC 740.
Key adoption dates
- Public companies: Annual periods beginning after December 15, 2024
- Non-public entities: Annual periods beginning after December 15, 2025
- Entities may adopt the amendments prospectively or elect retrospective application
FASB updated the requirements for income tax footnote disclosures to enhance transparency and usefulness to investors, lenders, creditors, and other users of financial statements. Specifically, the updates are designed to help these users better understand tax law exposures and provide more detailed information for cash flow forecasts.
The amendments expand effective rate reconciliation disclosures, require detailed disclosures of taxes paid, along with other additional disclosures relating to an entity’s operations, the highlights of which are provided below.
Rate Reconciliation Enhancements
For greater consistency, the following specific categories are required to be disclosed for public business entities using both percentages and amounts (for non-public entities percentage disclosure not required):
- State and local income taxes, net of federal benefit
- Foreign taxes
- Effect of changes in tax laws or rates
- Effect of cross-border tax laws
- Tax credits
- Changes in valuation allowances
- Non-taxable or nondeductible items
- Changes in unrecognized tax benefits
Additional disclosures are required for the effect of cross-border tax laws, foreign taxes (including details by country), a qualitative description of state and local income taxes jurisdictions that make up the majority of the amount, and unrecognized tax benefits. If not otherwise evident, additional qualitative disclosures are required for specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.
Income Taxes Paid
For all entities, the amount of income taxes (net of refunds) paid must be disclosed, categorized by federal, state, and foreign taxes. Further details as to payments made to individual jurisdictions must be presented for all amounts greater than 5% of the total income taxes paid.
Other Disclosures
Entities are required to report income or loss from continuing operations before income taxes, segmented by domestic and foreign sources. They must also disclose income tax expense from continuing operations, broken down into federal, state, and foreign components.
Further required disclosures include:
- The statutory tax rate applied, with an explanation if it differs from the federal rate
- Any changes in valuation allowances related to deferred tax assets
ASC 740 Disclosure Requirements: Before vs. After ASU 2023-09
| Disclosure Area | Before ASU 2023-09 | After ASU 2023-09 |
| Rate Reconciliation | Required for public entities; typically presented in either % or $ | Required tabular format for public entities showing both % and $ for reconciling items ≥ 5% of statutory rate; nonpublic entities may omit % |
| Categories in Rate Reconciliation | Flexible categories, not standardized | Required standardized categories: Federal, State, Foreign, Valuation Allowance, Tax Credits, Nondeductible Expenses, Other |
| Income Taxes Paid | Total taxes paid (net of refunds) disclosed on a gross basis in cash flow statement; often limited disclosure in footnotes | Required disaggregation of income taxes paid by federal, state, and foreign. Jurisdictions ≥ 5% of total must be individually disclosed |
| Income (Loss) Before Income Taxes | Required, but not necessarily disaggregated by geography | Must be disaggregated into domestic vs. foreign income (or loss) |
| Statutory Tax Rate Used in Reconciliation | Not explicitly required | Must disclose the statutory tax rate used and explain why it differs from the federal rate, if applicable |
| Valuation Allowance Changes | Limited narrative disclosure; changes often buried in deferred tax asset (DTA) rollforward | Must disclose qualitative and quantitative information about significant changes in valuation allowances |
| DTA/DTL Categories | Balance sheet classification and qualitative disclosures; detailed categories not always presented | No major change, but changes to valuation allowance disclosures may affect presentation and detail |
| Interim Reporting | No change | ASU 2023-09 does not change interim reporting requirements under ASC 740 |
What to do now
Review your current tax disclosures for compliance with the updated standards. Work with tax and accounting teams to gather required data, choose between prospective or retrospective adoption. If you’re a private company, evaluate the potential benefits of early adoption for 2025.
We suggest that companies begin working with their tax advisors now to understand these new requirements, assess what additional information is to be disclosed, and determine how to gather that information in advance of the effective dates.
For guidance tailored to your business, reach out to Lindsay Haskell at TaxOps to continue this discussion.
Read more ASC 740
Business Combinations: Taxable & Non-taxable Transactions
Getting ASC 740 Right: Avoiding Costly Tax Reporting Mistakes
ASC 740: Frequently Asked Questions, Accounting for Income Taxes
Significance of Inadequate Transfer Pricing Documentation on ASC 740
Disclaimer: This content is for educational purposes only and is not intended, nor should it be relied upon, as legal, tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.
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