FASB Project to Improve Income Tax Disclosures

by Jennifer Lous, CPA 

In 2022, the FASB began a project to make continued transparency and decision usefulness improvements to required income tax disclosures. Primarily, to provide enhanced information about the impact of an entity’s multi-jurisdictional operations and related tax risks and tax planning and operational opportunities. This is particularly important for public business entities, but some new disclosures will apply more broadly. 

Tax rate reconciliation table and other disclosures are critical to properly evaluate income tax risks and opportunities. Proposed enhancements are intended to help resource providers better: 

  • Understand the entity’s exposure to potential changes in multi-jurisdictional tax legislation and the subsequent risks and opportunities. 
  • Assess income tax information that affects cash flow forecasts and capital allocation decisions. 
  • Identify potential opportunities to increase future cash flows. 

For example, the proposal would require public business entities to disclose rate reconciliation information using percentages and reporting currency amounts. In addition, public business entities would provide a qualitative description of the state and local jurisdictions that contribute to “the majority” of the effect of the state and local income tax category (i.e., a simple majority – greater than 50 percent). There is even more useful information required to be disclosed in tabular form annually.

Certain proposed changes would also impact nonpublic business entities. For example, a requirement to qualitatively (not numerically) disclose the nature and effect of specific categories of reconciling items and individual jurisdictions that result in significant difference between the statutory tax rate and the effective tax rate.

Once finalized, the new disclosures will be required to be transitioned to on a prospective basis, with a retrospective option. It is anticipated that the new disclosures will start having an impact in calendar year 2025 on public business entities and in calendar year 2026 for other entities.

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