FASB Issues Exposure Draft Aimed to Enhance Transparency for Income Tax Disclosures

At a glance

• The main takeaway: FASB issued proposed amendments to income tax disclosures in the recent Exposure Draft Accounting Standards Update, Income Taxes (Topic 740): Improvements to Income Tax Disclosures with comment letters due on May 30, 2023.
• Impact on your business: The proposed changes aim to enhance transparency and modify certain requirements for public and non-public entities subject to income tax disclosures.
• Next steps: Aprio’s Tax Provision team is closely monitoring updates from FASB and can help you navigate the changes to income tax disclosures to ensure your tax reporting complies with the new standards.

Schedule a consultation with an Aprio Tax Advisor today.

In the article below, we include details from FASB’s Exposure Draft, Accounting Standards Update (ASU), Income Taxes (Topic 740): Improvements to Income Tax Disclosures. To read the proposed amendments in their entirety, click here.
The full story:
The Financial Accounting Standards Board (FASB) issued an Exposure Draft on March 15, 2023, consisting of proposed amendments in the Accounting Standards Update (ASU), Income Taxes (Topic 740): Improvements to Income Tax Disclosures.
These proposed amendments aim to enhance the transparency of income tax disclosures by providing businesses with detailed information to better assess how an entity’s worldwide operations, tax planning, and operational opportunities impact its tax rate, future cash flows and related tax risks. To achieve this enhanced transparency, FASB’s goals include:

• Understanding exposure to changes in jurisdictional tax, potential risks and opportunities.
• Assessing income tax information and how it impacts critical financial decisions, such as cash flow forecasts and capital allocation.
• Identifying opportunities to increase cash flow.

The proposed update would address investor requests for more transparency about improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. In the sections below, we highlighted these important takeaways, but you can also review FASB’s comprehensive Exposure Draft of the Accounting Standards Update (ASU), Income Taxes (Topic 740): Improvements to Income Tax Disclosures.

Changes to income taxes paid

While the amendments to income taxes paid may be minor, it would require all entities to disclose:

• The year-to-date amount of income taxes paid, on an interim and annual basis, disaggregated by federal (national), state, and foreign taxes.
• The amount of income taxes paid, on an annual basis, disaggregated by individual jurisdictions that is equal to or greater than 5% of total income taxes paid.

Changes to disclosures around rate reconciliation

If your entity is not a public business, these amendments would require a qualitative disclosure that details the items and individual jurisdictions resulting in a significant difference between the statutory and effective tax rates.

The amendments for rate reconciliation would require public business entities, on an annual basis, to disclose specific categories and provide additional information for reconciling items that meet a quantitative threshold equal to or greater than 5% of the applicable statutory tax rate.

According to FASB’s Exposure Draft, public business entities would be required to disclose a tabular reconciliation, which they have broken down into the following categories:

1. State and local income tax, net of federal (national) 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 unrecognized tax benefits

For any reconciling item that is equal to or greater than 5% of the applicable statutory federal (national) income tax rate, a separate disclosure is required. If a reconciling item falls within the:

1. Effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, it must be disaggregated by nature.
2. Foreign tax effects category, it must be disaggregated by jurisdiction (country) and by nature.

However, in the case of a reconciling item that does not fall within any of these categories, it must be disaggregated by nature. So, how will this impact income tax disclosures? FASB provides a key of sorts to assist businesses with categorizing items:

• The state and local income tax category would reflect income taxes imposed at the state or local level within the jurisdiction (country) of domicile.
• The foreign tax effects category would reflect income taxes imposed by foreign jurisdictions.
• The remaining six categories would reflect federal (national) income taxes imposed by the jurisdiction (country) of domicile.

The bottom line

FASB will determine the effective date and whether early adoption will be permitted after all feedback during the comment period has been collected, which ends on May 30, 2023. However, the amendments as proposed would be applied retrospectively.

Aprio’s Tax Provision team is closely monitoring updates from FASB and can help you navigate the changes to income tax disclosures to ensure your tax reporting complies with the new standards.

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Schedule a consultation with an Aprio Tax Advisor today