FASB approves updated rules for disclosing income taxes

Rate reconciliation

Under the updated guidance, companies will be required to provide a breakout of amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than a lump sum amount. Additionally, the rate reconciliation will require disaggregation into the following eight 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, and
8. Changes in unrecognized tax benefits.

These categories will be further disaggregated by jurisdiction and for amounts exceeding 5% of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate. The rate reconciliation table will need to disclose both dollar amounts and percentages. Currently, companies can disclose either the dollar amounts or the percentages.

However, the FASB clarified that the updated guidance won’t require country-by-country disclosures. This was a key misunderstanding that FASB members discussed when reviewing public comments on the proposal.

The FASB contends that the enhancements to the current rate reconciliation table will enable investors to better assess a company’s worldwide operations, related tax risks, tax planning and operational opportunities, all of which affect its tax rate and prospects for future cash flows.

Time for change

For public companies, the changes will go into effect for fiscal years beginning after December 15, 2024. Interim reporting will be required for the following fiscal years (starting the first quarter of 2026). The standard will go into effect a year later for privately held companies. Early adoption is permitted.

Contact us for help understanding the changes to the disclosure rules for income taxes and how they’ll affect your company. We can help you implement changes to your procedures and systems to gather the appropriate data to comply with the new rules.

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