FASB Accounting Standards Update for Income Taxes (ASU 2023-09): What You Need to Know

The Financial Accounting Standards Board (FASB) has introduced Accounting Standards Update (ASU) 2023-09 to enhance the transparency and usefulness of income tax disclosures. Investors, lenders, and other financial statement users have long sought greater insight into how a company’s operations, tax risks, and planning strategies impact its tax rate and future cash flows.

This update aims to improve visibility into how tax laws and jurisdictions affect a company’s tax position, provide investors and financial statement users with more meaningful disclosures for assessing cash flow impact, and increase transparency in tax reconciliation by requiring detailed breakdowns of significant tax-related items. As implementation approaches, businesses should begin preparing to ensure compliance with the new disclosure requirements.

The new disclosure requirements take effect as follows:

Entities may apply the amendments prospectively, though retrospective application is also allowed.

The new standard introduces enhanced rate reconciliation disclosure requirements for public companies, mandating a more detailed breakdown of key components in their effective tax rate reconciliation. Specifically, reconciling items that meet a 5% threshold of pretax income multiplied by the statutory tax rate must be disclosed in designated categories, including state and local income taxes (net of federal effect), foreign tax effects, changes in enacted tax laws or rates, tax credits (such as R&D or investment credits), changes in valuation allowances, nontaxable or nondeductible items, and adjustments for uncertain tax positions. For private companies, the requirement is less stringent, requiring only qualitative disclosures about reconciling items and jurisdictions that significantly impact the effective tax rate.

The new requirements for disclosing income taxes paid mandate that all entities disaggregate taxes by federal, state, and foreign jurisdictions, as well as by individual jurisdictions where tax payments meet or exceed 5% of total tax payments. This is especially significant for companies operating across multiple states or internationally, as it enhances transparency and provides greater visibility into tax liabilities across different jurisdictions.

ASU 2023-09 introduces additional notable changes to income tax disclosures. All taxable entities must now disaggregate pre-tax income and tax expense by reporting income (or loss) from continuing operations separately for domestic and foreign sources. Additionally, the update eliminates certain legacy disclosures, including the requirement to disclose estimated changes in uncertain tax benefits over the next 12 months. These changes aim to enhance clarity and reduce unnecessary reporting burdens.

With ASU 2023-09 effective as early as 2025 for many businesses, proactive preparation is key. Here’s what you can do now:

CSH’s team of experts can help you analyze the impact, update your financial statements, and ensure compliance. Contact us today to discuss how these changes affect your business and how we can assist with your transition.

Written by: Kathryn Elaskary

Source: ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures