Breaking it down
Background
As part of its disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements, the FASB added a project to its agenda in 2014 to improve transparency and decision-usefulness of existing income tax disclosures. In 2016, the board issued a proposed ASU, “Income Taxes (Topic 740): Disclosure Framework – Changes to the Disclosure Requirements for Income Taxes,” with the objective of reducing diversity in practice and providing the users of the financial statements more transparent information related to income taxes. Based on feedback and staff research, the FASB issued a revised proposal in May 2019.
In March 2022, the FASB decided to revise the project’s objective to focus primarily on cash paid for income taxes and the existing rate reconciliation disclosure. At its May 11, 2022, meeting, the FASB directed the staff to explore, through further outreach and research, approaches to disaggregate income taxes paid by jurisdictions and to require disclosure of individual reconciling items in the rate reconciliation disclosure on the basis of a quantitative threshold and specific categories of reconciling items.
At its Nov. 30, 2022, meeting, the FASB concluded its deliberations on a new proposal to make targeted improvements to existing income tax disclosure requirements, including disaggregation of cash taxes paid by jurisdiction and prescriptive categories to be included in the existing rate reconciliation disclosure. The FASB also reaffirmed its decision to include specific changes to disclosure requirements that were included in the 2019 proposed update.
On March 15, 2023, the FASB released a proposed ASU, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures,” reflecting the board’s decisions.
Proposed requirements
Cash paid for income taxes
ASC 230-10-50-2 currently requires disclosure of total cash paid for income taxes during the period. The proposed guidance would require disclosure of cash paid for income taxes disaggregated by federal, state, and foreign jurisdictions on both an interim and annual basis. In addition, the proposal would require on an annual basis further disaggregation by individual jurisdiction for each jurisdiction where cash taxes paid exceed 5% of total cash taxes paid by all of the jurisdictions. The proposal also clarifies that cash taxes paid should be presented net of income tax refunds received.
Rate reconciliation disclosure
ASC 740-10-50-12 currently requires public entities to disclose a rate reconciliation using percentages or dollar amounts of the reported amount of income tax expense attributable to continuing operations for the year to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income from continuing operations. The estimated amount and the nature of each significant reconciling item must be disclosed.
Based on stakeholder feedback that incremental information about reconciling items would be useful, the FASB tentatively decided to make targeted improvements to the existing disclosure requirement, including the following:
| Proposed disclosure requirements – public business entities |
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Disclose rate reconciliation information by the following specific categories, in a tabular reconciliation, with accompanying qualitative disclosures:
- State and local income tax, net of federal income tax effect
- Foreign tax effects
- Enactment of new tax laws
- Effect of cross-border tax laws
- Tax credits
- Valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
Provide disclosure of the nature, effect, and significant year-over-year changes for individual reconciling items within the categories listed if not evident. Separately disclose reconciling items by nature, on the basis of a quantitative threshold of 5%, within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible item categories.
Separately disclose reconciling items by nature and by jurisdiction, on the basis of a quantitative threshold of 5%, within the foreign tax effect category.
Separately disclose reconciling items by nature, on the basis of a quantitative threshold of 5%, for other items that do not fall within any specific category.
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Provide a qualitative disclosure about the states that contribute to the majority of the effect of the state and local income tax category.
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Disclose rate reconciliation information using both percentages and reporting currency.
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Provide a description, on an interim basis, about the reconciling items that cause significant changes in the annual effective tax rate from the prior annual reporting period.
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The proposal also clarifies that the state and local income tax category noted earlier would represent taxes imposed at the state or local level within the jurisdiction or country of domicile.
Crowe observation: The proposed improvements to the existing rate reconciliation disclosure requirement would align public business entity rate reconciliation disclosure requirements in U.S. GAAP to existing Securities and Exchange Commission (SEC) requirements to disclose rate reconciling items in excess of a quantitative threshold of 5%. However, the proposed requirements would go one step further by also requiring disclosure of certain categories regardless of whether the 5% threshold is met.
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Current requirement – nonpublic entities
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Proposed requirement – nonpublic entities
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The nature of significant reconciling items should be disclosed but may omit a numerical reconciliation. (ASC 740-10-50-13)
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Disclose qualitative information about specific categories and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.
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Crowe observation: While the specific categories for disclosures for nonpublic entities are not defined, categories used could include the categories specifically defined in the public entities requirements already noted.
Income statement
ASC 740-10-50-10 requires all entities to disclose the amount of income tax expense (or benefit) allocated to continuing operations and the amounts separately allocated to other items (for example, discontinued operations or other comprehensive income (loss)) each year for which those items are presented. The FASB’s proposal would expand these requirements to also require disclosure of income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign jurisdictions, and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign taxes.
Crowe observation: The disclosure of income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic components and foreign components is a disclosure requirement of the SEC. FASB staff noted that the feedback received on the proposal indicated there is diversity in practice under the SEC requirements related to whether income (or loss) from continuing operations is disclosed before or after intra-entity eliminations. Since an entity is taxed in a foreign jurisdiction on the basis of the entity’s income in that jurisdiction, which includes any intra-entity transactions, we understand that the staff’s view is to disclose income (or loss) from continuing operations before intra-entity eliminations.
Previously proposed disclosures affirmed
The proposed ASU also would incorporate the following proposals that originally were included in the FASB's 2019 proposed ASU:
- Replace the term “public entity” with the term “public business entity.”
- Eliminate the requirement in ASC 740-10-50-15(d) for all entities to 1) disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or 2) make a statement that an estimate of the range cannot be made.
- Remove the requirement in ASC 740-30-50-2(b) to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.
Transition
Entities would adopt the provisions on a retrospective basis, that is, as of the beginning of the earliest period presented in the financial statements.
Next steps
Entities should review the proposed guidance and determine if commenting is warranted.
