FASB to Issue Proposed Accounting Standards Update on Targeted Improvements to Income Tax Disclosures

FASB to Issue Proposed Accounting Standards Update on Targeted Improvements to Income Tax Disclosures

The Financial Accounting Standards Board (FASB or Board) met on November 30, 2022, to discuss staff recommendations for enhancements to income tax disclosure requirements as part of the Board’s current project on targeted improvements to income tax disclosures. The Board discussed feedback received from users and preparers of financial statements on the proposed changes and decided that targeted improvements to disclosures for income taxes paid and the rate reconciliation are needed. The FASB anticipates issuing a proposed Accounting Standards Update (ASU) for comment in early 2023.

The current project focusing on targeted improvements to certain disclosures is an evolution of work that the FASB began in 2014 when the income tax disclosure project was added to the Board’s technical agenda, with the purpose of improving the effectiveness of income tax disclosures. The first exposure draft was issued in 2016, and an updated proposed ASU was issued in 2019.  However, no decisions were made at the Board’s subsequent meeting in early 2020 to discuss the project, and the Board directed the staff to do additional research. The Board met again in early 2022 and decided to revise the scope of the project to focus on disaggregation of certain income tax information, with the ultimate focus being on income taxes paid and the rate reconciliation.

Income Taxes Paid

The Board decided in the November 30, 2022, meeting to require that all entities disclose income taxes paid disaggregated by federal, state and foreign taxes. In addition, the Board agreed with the staff recommendation to apply a quantitative threshold. As such, an entity would be required to disclose the amount of income taxes paid for each individual jurisdiction using a quantitative threshold of 5%of the total amount of income taxes paid.

The requirement to disclose income taxes paid disaggregated by federal, state and foreign taxes would be applicable for both annual and interim periods.  The requirement to disclose income taxes paid for each individual jurisdiction using a greater than 5% of total income taxes paid threshold would only be required on an annual basis. The Board also clarified that the amount disclosed for income taxes paid should be net of actual refunds received.

BDO Insight

The data for cash taxes paid should be readily available for most companies as the information is needed for tax return compliance purposes.

Rate Reconciliation

With respect to the presentation of the rate reconciliation, the FASB agreed with the staff recommendations for certain specific required categories. For public business entities, the basic minimum categories to include in the rate reconciliation would be: 

  • State and local income tax, net of federal income tax effect 
  • Foreign tax effects 
  • Enactment of new tax laws 
  • Effect of cross-border tax laws 
  • Tax credits 
  • Valuation allowances 
  • Nontaxable or nondeductible items 
  • Changes in reserves for tax positions.

The expectation is that the tax effects of state and local income taxes would be centralized in the state and local income tax category. In addition, the tax effects of foreign operations would be centralized in the foreign tax effects category. The remaining specific categories would primarily reflect the domestic tax effects.

BDO Insight

While many companies already include the total effects of state and local taxes in the rate reconciliation line for state taxes, the proposed requirement to reflect all of the foreign tax effects in one line could be a significant change for many companies. Many companies currently include a line in their rate reconciliation that is meant to reflect the foreign rate differential between the domestic tax rate and the tax rates in the various foreign jurisdictions that a company operates. Currently, other specific items for a company’s foreign operations, such as changes in valuation allowance, uncertain tax positions, and nondeductible/non-taxable items may be reflected in other appropriately captioned line items. This proposed change would require that all of the foreign tax effects be included in one line item. 

Note that the proposed category for the effect of cross-border tax laws is intended to be based on the country of domicile. For a U.S. based company, this would include domestic tax impacts such as GILTI.

The Board also decided to require the application of a quantitative threshold of 5% to determine the reconciling items to be separately disclosed. This would apply within a particular category, such as foreign tax effects. 

For example, if the net impact of foreign tax effects is 2%, with Country A negatively impacting the rate by 10% and Country B favorably impacting the rate by 8%, then both Country A and Country B would be disaggregated from the foreign tax effects line and separately disclosed by nature and by jurisdiction.

The Board also decided that the rate reconciliation should be presented in both dollars and percentages.

Affirm Previously Proposed Amendments

The Board decided to include in the proposed ASU certain amendments that were previously included in the 2019 revised exposure draft. These include: 

  • Replacing the term “public entity” with the term “public business entity.” 
  • Eliminating the requirement for all entities to (i) disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or (ii) make a statement that an estimate of the range cannot be made. 
  • Removing the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures. 

Considerations for Private Companies

The disclosure requirements for income taxes paid would apply to both public business entities and private companies. However, the disclosure requirements for the rate reconciliation for private companies are not as extensive as for public business entities. Private companies will need to provide a qualitative disclosure about specific categories and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.

Transition

When the proposed ASU is issued, a 75-day comment period is expected. In addition, the expectation is that the proposed ASU will require retrospective transition for all income tax disclosures. Under this alternative, an entity would be required to apply the income tax disclosures for all periods presented for comparative purposes.

Conclusion

While the proposed ASU to be issued is expected to target areas where there is general support by stakeholders on improving transparency, the potential changes to the rate reconciliation will most likely require greater effort by both the preparer and the company’s auditors as part of the financial statement audit process. For more information, contact BDO.