The first Form 10-K filing season under Accounting Standards Update (ASU) No. 2023-09 is complete for many filers. What lessons can filers apply as they prepare for the second year?
This piece explores BDO's in-practice observations from working with clients, discussing where the rule language required companies to exercise judgment, how those decisions appeared in filings, and what questions stakeholders raised about the new disclosures. It also covers key lessons for the next filing cycle, including for public business entities (PBEs) that have not yet filed under the new rules.
ASU 2023-09: A Brief Recap
ASU 2023-09 took effect for public companies (that is, PBEs) beginning after December 15, 2024 — making 2025 the first reporting year for most PBEs on a calendar-year schedule. Private companies will begin reporting for the 2026 calendar year when they prepare their 2026 financials in 2027.
For a technical breakdown of the new guidance, read our previous insight on ASU 2023-09: Improve Transparency Under ASC 740: New Income Tax Disclosures (ASU 2023-09). Considerations specific to private companies’ first-year filings will be addressed in a later article.
Retrospective vs. Prospective Adoption
The past filing season made clear that adhering to the ASU 2023-09 disclosure rules is not simply an exercise in compliance. The decisions companies made in their filings shaped how their tax stories are presented to investors, analysts, auditors, and the broader public. Those decisions have now established a comparability baseline, and companies need to maintain consistency in the years ahead. That starts with establishing and documenting the categorization policies selected to avoid inconsistent reporting across filing periods.
One of the biggest decisions companies had to make was whether to adopt the new ASU 2023-09 disclosure requirements retrospectively or prospectively.
- Prospective adoption: Apply the new disclosure rules only to 2025, with prior years continuing under the legacy format. This is simpler to execute but limits comparability across periods presented.
- Retrospective adoption: Restate the two prior years (2023 and 2024) under the new disclosure rules. While this requires more effort, it provides consistency across all periods presented.
As companies considered prospective and retrospective adoption of the new disclosure rules, they had to weigh the benefits of comparability against the operational investment required to restate prior-year filings.
Stakeholder Reactions and Questions
Regardless of the adoption approach, in the first filing season stakeholders raised questions regarding data quality, classification judgments, and consistency.
Stakeholders closely examined the largest reconciling items and the year-over-year movements of those items. They considered whether those items represented structural elements of a company’s tax profile — such as jurisdictional mix, permanent incentives, and recurring credits — versus discrete or one-time items events, audit settlements, releases of valuation allowances, or return-to-provision adjustments.
Analysts are increasingly reconstructing a normalized or run-rate effective tax rate (ETR) using the expanded categories introduced by ASU 2023-09, at times challenging management when the implied normalized rate differs from externally communicated expectations. As a result, reconciling items that were previously aggregated as “Other” are now more likely to attract scrutiny — particularly credits, valuation allowance changes, foreign rate differentials, and permanent items tied to entity or supply-chain structures.
Auditors and audit committees focused on how companies mapped legacy tax accounts to new required categories, including controls over jurisdiction tagging, withholding identification, uncertain tax positions, and return-to-provision adjustments, as well as the basis for aggregation versus separate presentation. Auditors often scrutinized any changes in allocation methodologies or classification between periods — particularly reclassification out of “Other” categories — even when the underlying economics had not changed.
BDO Insight
Expanded disclosures provide stakeholders greater visibility into tax planning strategies and geographic profit allocation, and companies must factor that visibility into how they frame and explain their disclosures. Companies will face greater pressure to demonstrate that disclosed outcomes are defensible, consistently applied, and clearly explained. In simple terms, they need to know their tax stories. Changes in classification, rather than underlying economies, can alter how those stories read to outside observers.
To that end, companies are required to prepare a technically grounded ETR narrative that distinguishes permanent versus temporary effects, structural versus nonrecurring or one-off items, and rate mix versus tax law changes.
Organizations that proactively align their tax, accounting, and finance teams on categorization decisions before deadlines loom will put themselves in a far stronger position when it comes time to file. In particular, companies must remember that the expanded disclosure requirements mean footnote preparation can no longer be treated as a final step in the close calendar: It needs to happen earlier.
Foreign Tax Effects: Materiality Judgment and Disaggregation Decisions
Under ASU 2023-09, companies must disaggregate foreign tax effects by both jurisdiction and nature for any reconciling item meeting the 5% quantitative threshold. That requirement created just a handful of new line items for some businesses while significantly expanding rate reconciliation for others, depending on the geographic profile of their operations.
For multinational companies, the new disclosures could meaningfully expand the size of rate reconciliation. For example, a company with operations in Ireland, Mexico, Switzerland, and the UK might need to disaggregate statutory rate differences, valuation allowance changes, and other reconciling items for each country where those items met the threshold, even if the country’s total tax effect did not.
The 5% threshold requires filers to exercise judgment because it can translate to a relatively smaller dollar amount when pretax income is low in any given year. During the first year of adoption, companies had to determine whether separately disclosing a technically qualifying item would be meaningful or material to investors. The FASB has affirmed that items can be aggregated when they are not material, even if the quantitative threshold has been met. Securities and Exchange Commission Chief Accountant Kurt Hohl reinforced that position in March 2026, stating that the FASB rules have an “overriding premise of materiality” — meaning that even if items meet the 5% threshold but are not material to a reasonable investor, companies must not feel obligated to disclose them. As a result, different companies took different approaches: Some provided detailed country-level disaggregation, while others presented more aggregated disclosures.
Looking ahead, if a jurisdiction or line item was separately disclosed in the first filing, companies must continue presenting it in rate reconciliation for subsequent years — even if it falls below 5% threshold — until it naturally cycles off the three-year comparative window.
BDO Insight
Stakeholders are increasingly interpreting foreign rate differential less as technical adjustment and more as proxy for geographic earnings mix and tax strategy. Common lines of inquiry from stakeholders include whether changes are driven by profit mix shifts into lower tax jurisdictions versus actual rate changes, incentives, or other tax law changes.
Unrecognized Tax Benefits
ASU 2023-09 introduced a rate reconciliation line for changes in unrecognized tax benefits (UTBs), but the wording of the standard gave companies discretion in how to apply it. The first filing season reflected that discretion.
Under the final standard, companies must present changes in UTBs related to prior-year positions on a dedicated UTB line, aggregated across all jurisdictions. For current-year UTBs, the standard uses the word “may” for categorizing UTBs, which means companies can either net the UTB against the tax category that generated it or include it in the UTB line.
That single word created presentation differences. For example, a company that nets a $100,000 UTB reserve against a $1 million research and development credit presents $900,000 in credits, whereas a company that keeps those items separate presents $1 million in credits and a $100,000 UTB line. Both are permissible, but the ETR could read differently to an outside observer.
BDO Insight
Many companies opted to present all UTB changes on a single line, likely in the interest of simplicity and consistency.
Cash Taxes: Alignment With Tax Expense and Cash Flow
Stakeholders are now using cash taxes more directly in cash-flow modeling, raising the importance of those taxes beyond compliance disclosures.
Stakeholders commonly ask why cash taxes diverge from tax expense, with particular focus on the impact of prior-year true-ups, audit settlements, withholding taxes, intercompany payments, and the use of loss carryovers and other tax attributes. Jurisdictional cash-tax disclosures are frequently incorporated into near-term liquidity and forecasting models, raising stakeholder expectations regarding consistency and clear explanations.
Outside observers sometimes incorrectly assume that cash taxes paid in a jurisdiction correlate with profitability. But timing differences, withholding taxes, and audit settlements can distort that picture. Bonus depreciation is an example of that misconception: Companies benefit from lower cash taxes upfront as a result of full expensing but will face a higher cash tax burden in future years as book depreciation continues with no additional tax deduction available.
BDO Insight
Companies must be prepared to clearly explain the relationship between tax expense and cash taxes. The explanation must address timing, withholding taxes, attribute use, and credit mechanics, and companies are required to be able to articulate the drivers behind their largest cash-tax jurisdictions and whether that profile is expected to continue.
State Taxes: A Gap in Disaggregation Requirements
Unlike for foreign tax effects, ASU 2023-09 does not require disaggregation of state and local tax reconciling items in the rate reconciliation. Companies are required to qualitatively disclose only the states making up the majority (greater than 50%) of the state and local tax effect.
That threshold allows for significant activity in a state line that is not visible to observers reading a filing. Apportionment changes, footprint shifts, discrete items, valuation allowance, and state tax credits may all be embedded in a single line with limited explanation.
BDO Insight
A qualitative description conveys where the bulk of state activity is located but might not offer much other useful insight to stakeholders. Some stakeholders might attempt to reference the information against the new cash taxes paid by jurisdiction disclosure to fill in the gaps, but that comparison has its own limitations.
With greater disaggregation across the rest of the disclosure, stakeholders are increasingly expecting more specific explanations about state credits, ETR effects, and state tax activity drivers, even when the standard does not technically require them.
Spotlight on Emerging Growth Companies and Fiscal-Year Filers
Some PBEs — namely those that qualify as emerging growth companies (EGCs) — were eligible for extended transition periods and might have elected to defer adoption of ASU 2023-09 until it becomes effective for private companies. For this group, the first filing season offers a valuable opportunity to learn from the experiences of other PBEs before making their own disclosure decisions.
Tax leaders at EGCs must collaborate with their SEC and/or controller group to weigh whether to adopt retrospective or prospective disclosures, considering the kinds of questions PBEs fielded about their tax stories during the first filing season.
When making that decision, EGCs must also remember that the choices they make in their first filings will establish comparability baselines that they will need to maintain in subsequent years.
Looking Ahead
Companies must approach the second filing season under ASU 2023-09 with comparability as a guiding principle. They will need to provide clear and concise narratives that explain judgment decisions to all relevant stakeholders. Respondents to the 2026 BDO Tax Strategist Survey cited the new requirements as a top challenge in the next 12 months, so starting early is critical. Companies that align their tax, accounting, and finance teams on categorization decisions ahead of time will be better positioned to file accurately and on time.
Companies must also assess how outside advisors can help fill gaps in capabilities. In evaluating potential partners, they must also seek advisors who can provide ready-made models and technology built specifically to handle the new disclosures, particularly for businesses that have not built that infrastructure internally.
Have questions about ASU-2023 adoption? Contact our income tax accounting team.