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Breaking it down
In early 2022, the FASB shifted the purpose of a long-standing project on income tax disclosures to focus on improving the quality of the existing rate reconciliation disclosure and disclosure of income taxes paid in Topic 740, “Income Taxes.” Throughout the evolution of the project, investors consistently have called for greater transparency to allow for better projection of tax-related future cash flows and greater understanding of tax-related risks and opportunities, while many preparers have noted concerns about the operability of such detailed disclosures.
Rate reconciliation disclosure for PBEs
Under the final standard, PBEs will be required to disclose a rate reconciliation consisting of, at minimum, the categories listed in the following table. The reconciliation must be in a tabular format, presented in both dollar amounts and percentages, and provided on an annual basis.
Reconciling items are subject to further disaggregation within certain categories when an item exceeds a 5% threshold – that is, if the effect of a reconciling item is equal to or greater than 5% of income (or loss) from continuing operations before tax multiplied by the applicable statutory income tax rate.
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Rate reconciliation categories
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Tentative board decisions
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Enactment of new tax laws
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Reflects the cumulative adjustment to deferred tax assets and liabilities as of the enactment date and changes in income taxes payable or refundable for prior years resulting from the enactment of new tax laws in the reporting period
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Effect of cross-border tax laws
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Reconciling items in excess of 5% threshold disaggregated by nature
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Tax credits
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Reconciling items in excess of 5% threshold disaggregated by nature
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Valuation allowances
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Reflects subsequent adjustments made in the current year to valuation allowances initially recognized in the prior year
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Nontaxable or nondeductible items
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Reconciling items in excess of 5% threshold disaggregated by nature
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Changes in unrecognized tax benefits
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Permits entities to aggregate disclosure of changes in unrecognized tax benefits for all jurisdictions
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State and local income tax, net of federal (national) income tax effect
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Qualitative description of state and local jurisdictions contributing to a majority of the effect of this category (greater than 50%)
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Foreign tax effects
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Reconciling items in excess of 5% threshold disaggregated by nature and jurisdiction (except for changes in unrecognized tax benefits)
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Reconciling items that exceed the 5% threshold but do not fall within any of the required categories also must be separately disclosed by nature. Entities will be required to provide an explanation of other individual reconciling items disclosed, if not otherwise evident.
Crowe observation: In contrast to the proposal, the final standard will allow for aggregate presentation of changes in unrecognized tax benefits. This change addresses preparer feedback that disaggregation could expose entities to commercial risk. The board also voted to remove a proposed interim disclosure that would have required a description of significant reconciling items between the estimated annual effective tax rate in the interim reporting period and the effective tax rate per the most recent annual reporting period.
The final standard will clarify that all reconciling items should be presented on a gross basis unless specific guidance permits net presentation. It also will permit entities to disclose on a net basis certain cross-border tax law effects (for example, global intangible low tax income and related foreign tax credits).
The board also elected to align the forthcoming disclosure requirements with U.S. Securities and Exchange Commission guidance, allowing a foreign entity to use a statutory rate other than that of its country of domicile in its rate reconciliation. Foreign entities making this election would be required to disclose both the rate used and the justification if the rate chosen is not the U.S. federal corporate income tax rate.
Crowe observation: The board elected not to issue additional guidance for entities operating in minimal- to no-tax-rate jurisdictions or entities operating at a breakeven, for whom reconciling items with small dollar amounts can easily trigger the 5% threshold. However, the board did agree to retain the discussion of materiality in the basis for conclusions. Furthermore, because PBEs are required to present the tabular rate reconciliation in both dollar amounts and percentages, reconciling items that are high in relative proportion but low in actual dollar amount would be immediately evident.
Members of the board emphasized that entities are permitted to disclose additional information to illustrate their “tax story” to investors and other stakeholders. Examples of scenarios that could elicit further elective disclosures could be industry-specific tax treatment, significant unusual transactions, and use of alternative minimum tax or the proportional amortization method. Members of the board emphasized that judgment likely will be required to categorize some reconciling items.
Rate reconciliation disclosure for entities other than PBEs
Entities other than PBEs are required to make qualitative disclosures regarding the nature and effect of the same specific categories of reconciling items as well as individual jurisdictions that result in a significant difference between the statutory and effective tax rates. They are permitted, but not required, to disclose a tabular, quantitative reconciliation.
Income taxes paid and income statement-related disclosures
Under the final standard, all entities will be required to make additional disclosures on income taxes paid as well as on certain income statement-related disclosures, as follows:
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Disclosure
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Disaggregation requirement
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Frequency
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Year-to-date income taxes paid (net of refunds received)
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Disaggregated by federal, state, and foreign
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Annual
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Income taxes paid (net of refunds received)
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Disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received)
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Annual
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Income (or loss) from continuing operations before income tax
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Disaggregated by domestic and foreign
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Annual
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Income tax expense (or benefit) from continuing operations
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Disaggregated by federal, state, and foreign
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Annual
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Other disclosures previously exposed to comment
The FASB elected to affirm decisions regarding proposals that appeared in a 2019 exposure draft, including the following:
- Replace the term “public entity” with the term “public business entity.”
- Eliminate requirements for entities to 1) disclose the nature and estimate of the reasonably possible change in unrecognized tax benefits in the next 12 months, or 2) make a statement that an estimate is not practicable.
- Remove the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.
Transition and effective date
Entities will be required to apply the final standard on a prospective basis but also will have an option to apply retrospectively. Early adoption is permitted.
The final standard will be effective for PBEs for annual reporting periods beginning after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025. For example, a PBE with a calendar year-end must adopt the annual disclosure requirements beginning with its annual report for the year ended Dec. 31, 2025, and interim disclosure requirements for quarterly reports thereafter.
Entities other than PBEs are granted an additional year for adoption. The amendments are effective for such entities for annual reporting periods beginning after Dec. 15, 2025, and interim periods within fiscal years beginning after Dec. 15, 2026.
