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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 ASU, PBEs are 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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Guidance
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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%), beginning with the jurisdiction with the largest effect in descending order
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Foreign tax effects
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Reconciling items in excess of the 5% threshold disaggregated by nature and jurisdiction (except for changes in unrecognized tax benefits)
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Effect of changes in tax laws or rates enacted in the current period
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Reflects the cumulative tax effects of a change in enacted tax laws or rates on current or deferred tax assets and liabilities at the date of enactment
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Effect of cross-border tax laws
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Reconciling items in excess of the 5% threshold disaggregated by nature
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Tax credits
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Reconciling items in excess of the 5% threshold disaggregated by nature
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Changes in 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 the 5% threshold disaggregated by nature
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Changes in unrecognized tax benefits
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Reflects reconciling items resulting from changes in judgment related to tax positions taken in prior annual reporting periods (such as subsequent recognition, derecognition, and change in measurement of unrecognized tax benefits)
Permits entities to aggregate disclosure of changes in unrecognized tax benefits for all jurisdictions
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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 are required to provide an explanation of other individual reconciling items disclosed, if not otherwise evident.
The ASU clarifies that all reconciling items should be presented on a gross basis except where the guidance specifically permits net presentation, as follows:
- Certain cross-border tax law effects (for example, global intangible low-taxed income and related foreign tax credits)
- Unrecognized tax benefits and their related tax positions taken or expected to be taken within the same reporting period
Crowe observation: In contrast to the proposal, the final ASU allows 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 ASU also aligns 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 are 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 ASU does not provide additional guidance for entities operating in minimal- to no-tax-rate jurisdictions or entities operating at a breakeven, for which reconciling items with small dollar amounts can easily trigger the 5% threshold. However, the board notes in the basis for conclusions that an entity operating under either of these circumstances should use judgment in evaluating the appropriateness of using a different statutory rate or assessing the materiality of reconciling items. 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 should be immediately evident.
During deliberations, 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 new guidance, all entities are required to make additional disclosures on income taxes paid as well as on certain income statement-related disclosures, on an annual basis.
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Disclosure
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Disaggregation requirement
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Income taxes paid (net of refunds received)
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Disaggregated by federal, state, and foreign
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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Income (or loss) from continuing operations before income tax
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Disaggregated by domestic and foreign
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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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Other disclosures previously exposed to comment
The ASU includes other new disclosure requirements arising from certain 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 are required to apply the final standard on a prospective basis but also have an option to apply retrospectively. Early adoption is permitted.
The ASU is effective for PBEs with 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 ending 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.
