FASB’s New Accounting Rules Expand Attention to Tax Disclosures

In its Accounting Standard Update on improved income tax disclosures announced Dec. 14, 2023, the Financial Accounting Standards Board noted its intent to make income tax disclosures more transparent and useful.

The amendments apply to public business entities for annual periods beginning after Dec. 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after Dec. 15, 2025.

Investors will find the disclosures helpful, but companies and tax professionals first need to review and understand the new income tax disclosure requirements. The main provisions affect rate reconciliation and income taxes paid. FASB also eliminated certain income tax disclosure requirements that should be analyzed for applicability.

One significant change requires companies to disclose details meeting the 5% disclosure reporting threshold in these eight categories:

• State and local income tax
• Net of federal income tax effect
• Foreign tax effects
• Effects of changes in tax laws or rates enacted in the current period
• Effect of cross-border tax laws
• Tax credit changes in valuation allowances
• Nontaxable or nondeductible items
• Changes in unrecognized tax benefits

The current disclosure allows reporting in amounts or percentages, but the new standard requires reporting in both amount and percentage.

Companies should review their current disclosure process to determine gaps compared to the new standard and best practices. They should consider the new reporting disclosures during the 2023 and 2024 year-end periods to determine the time and effort they will need to be prepared for 2025.

C-Suite Guidance

CEOs, chief financial officers, and chief accounting officers will need guidance on these changes and the new disclosures so they’re prepared to respond to questions from investors during quarterly earnings calls.

One of the goals of the standard, also requested by stakeholders, is to expand disclosures. This change will potentially generate more questions over time, especially in the year after adoption as stakeholders are more able to compare between years.

This ASU has been in various proposed versions since 2015. Since it’s now finalized, companies and their consultants should start analyzing the new standard and its impacts to the company, management, stakeholders, and provision preparers.

Processes and Documentation

Companies will need to closely examine their tax provision processes and controls, ensuring they have the appropriate level of detail to comply with enhanced disclosures.

This may mean modifications to data collection, processing, and reporting systems to implement these changes effectively. FASB acknowledged in its Basis for Conclusions Benefits and Costs analysis that companies will likely incur increased costs related to additional processes, systems, and controls to comply with the increased disclosures.

Upon adoption of the new standard, additional detailed information may be required from certain data sources, such as foreign subsidiaries. Tax professionals and companies may need to plan for more time to comply and document the process to comply with the categories of reconciling items that meet or exceed the 5% threshold.

Although most of the information needed to comply with the standard may be already available in a company’s current process, companies should consider:

• Reviewing current processes and controls
• Updating processes and controls to meet the new standard as needed
• Updating work papers and disclosures to meet the new standards
• Software updates or Excel model updates
• Creating documentation of updates for audit support and internal controls

Technology and Software

A final area to consider is income using technology and software to reduce risk and simplify reporting. Excel spreadsheets are rigid and may be difficult to update for the new ASU guidelines, so they may take some time to update.

From a control perspective, using technology and software, including data gathering tools, is helpful for accuracy in reporting. Technology tools streamline the process, while providing strong review and audit support can help generate accurate automated reconciliations and provide reports for comparisons with prior periods and data analytics.

Looking Ahead

As tax professionals and companies adapt to the new standards, they should document steps they take to implement changes, including assessment, policy updates, and system modifications. This documentation will be useful and likely required for controls and audit support.

If the latest ASU seems overwhelming, companies may opt to consult with accounting professionals and auditors to ensure compliance with the new standard. Income tax provisions require both technical expertise and professional judgment. Getting the numbers correct the first time around is critical.

Errors discovered in the income tax provision can have significant adverse consequences. This can result in control deficiencies, significant deficiencies, or material weaknesses. As such, companies and tax professionals alike need to thoughtfully prepare to implement the new standard.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brian Simpson is tax partner and corporate income tax practice leader at Baker Tilly. He leads the Dallas office’s corporate income tax practice and the firm’s accounting for income tax practice.

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