Preparing financial statements to comply with ASU 2023-09 for income tax disclosure in 2025 requires a clear understanding of the new disclosure requirements and thoughtful planning to implement them effectively. ASU 2023-09, issued by the Financial Accounting Standards Board (FASB) in December 2023, aims to enhance transparency by requiring more detailed and disaggregated disclosures of income tax information, especially for public business entities (PBEs) starting with fiscal years after December 15, 2024 (i.e., calendar year 2025 for most PBEs)[1][4].
If you’re involved in financial reporting or tax accounting, getting ahead on these changes is crucial. The update affects all entities subject to ASC 740 but has earlier deadlines for PBEs compared to other entities. Here’s how you can prepare your financial statements and disclosures to meet these new requirements smoothly, with practical tips and examples.
First, it’s important to grasp the key disclosure areas ASU 2023-09 focuses on:
Expanded rate reconciliation disclosures: Entities must break down the difference between their effective tax rate and statutory tax rate into more granular categories, improving clarity on what factors drive these differences[1][2].
Disaggregation of income taxes paid: You now need to disclose income taxes paid net of refunds by federal, state/local, and foreign jurisdictions. Furthermore, for any jurisdiction that accounts for 5% or more of total income taxes paid, separate disclosure by that jurisdiction is required[4][6].
Disaggregation of income and related income tax expense: Income or loss from continuing operations before income tax expense (or benefit) must be split between domestic and foreign components, with the related income tax expense disaggregated by federal, state, and foreign components[4][6].
Removal of some previously required disclosures: For example, the requirement to disclose undistributed earnings of subsidiaries under certain conditions has been eliminated[6].
Step 1: Understand Your Entity’s Status and Timeline #
The first practical step is to determine your entity’s classification because it affects your effective date and approach. PBEs have to adopt ASU 2023-09 for annual periods beginning after December 15, 2024. Non-PBEs have an extra year, adopting for periods after December 15, 2025. Early adoption is permitted, so if you want to get ahead, that’s an option[1][7].
For example, a publicly traded company with a calendar year-end must prepare its 2025 financial statements in compliance, which means your preparation should be well underway by late 2025, ideally starting in the first half of the year.
Step 2: Collect Detailed Tax Data by Jurisdiction #
The new requirements mean you need a robust system to track income taxes paid and income before tax across multiple jurisdictions. Many entities operating internationally or in several U.S. states will find this especially challenging.
Here’s what you’ll need:
Income taxes paid and refunds received, broken down by federal, state/local, and foreign jurisdictions.
Identification of individual jurisdictions that exceed the 5% threshold of total income taxes paid.
Income (or loss) from continuing operations before income tax expense, separately for domestic and foreign components.
Income tax expense (or benefit) from continuing operations, disaggregated by federal, state, and foreign sources.
A practical tip is to work closely with your tax and accounting teams to map out all jurisdictions where the entity pays taxes and ensure your tax software or ERP system can generate the needed reports. If your current systems don’t track income taxes paid at that level of detail, you’ll need to implement enhancements or manual tracking processes.
Step 3: Apply Materiality Judgment Thoughtfully #
ASU 2023-09 does not explicitly define materiality for the new disclosures, but it references general GAAP guidance that immaterial items do not need to be separately disclosed, even if they meet quantitative thresholds[1]. This means you’ll need to combine quantitative analysis with qualitative factors.
For instance, if a jurisdiction represents 6% of total taxes paid but is considered immaterial based on qualitative factors like volatility or strategic importance, you might decide to omit separate disclosure. However, you should document your rationale carefully for auditors and users of financial statements.
Step 4: Expand Rate Reconciliation Disclosures #
Your income tax rate reconciliation schedule—the explanation of differences between your effective tax rate and statutory tax rate—must now be more detailed. The ASU expects more consistent categorization and disaggregation.
Common reconciliation items to review include:
Permanent differences (e.g., nondeductible expenses)
Changes in tax laws or rates
Foreign tax rate differences
Valuation allowances
Tax credits
For example, instead of lumping all permanent differences into one line, you might need to break them down into subcategories that provide more insight into their nature and magnitude.
Step 5: Prepare the Income Tax Paid Disclosures #
This is a new requirement that can catch entities off guard. You must disclose the amount of income taxes paid, net of refunds, disaggregated by jurisdiction annually. This includes federal, state/local, and foreign levels, plus any jurisdictions meeting the 5% rule.
A practical approach is to start gathering historical data for at least the prior fiscal year to understand your tax payments across jurisdictions. This data will also help in preparing comparative disclosures where applicable.
Step 6: Consider Presentation and Consistency #
ASU 2023-09 requires consistent application of these disclosures across reporting periods. For example, income and income tax expenses should be disaggregated consistently, either before or after intercompany eliminations, but the chosen method should be applied uniformly.
Think through how these new disclosures will fit within your existing financial statements, including notes to the financial statements. Communicate early with auditors and financial statement users to ensure clarity and avoid surprises.
Step 7: Review and Update Disclosure Controls and Processes #
Given the increased granularity and new data requirements, your company’s disclosure controls and procedures may need updates. This includes training finance and tax staff on the new requirements and enhancing internal review processes to ensure accuracy and completeness.
Step 8: Document Everything Thoroughly #
Since ASU 2023-09 involves judgment on materiality and categorization, maintain strong documentation to support your decisions. This will be crucial during audits and for future reference as standards evolve.
Practical Example:
Imagine you are the CFO of a multinational manufacturing company. Previously, your tax disclosures showed a single effective tax rate reconciliation and a total tax expense line. Now, you’ll need to:
Break down your income before taxes into domestic and foreign earnings.
Disaggregate your tax expense by federal, state, and foreign components.
Report income taxes paid by each jurisdiction, identifying countries or states exceeding 5% of total taxes paid.
Provide a more detailed rate reconciliation explaining why your effective tax rate differs from the statutory U.S. federal rate.
This might mean coordinating with subsidiaries worldwide to collect precise tax payment data and working with your tax advisors to categorize reconciliation items accurately.
Why This Matters:
Investors and analysts value transparency around income taxes because it helps them understand potential risks, planning strategies, and future cash flows. According to Deloitte, this increased disclosure enables users of financial statements to grasp the nature and size of factors causing differences in tax rates, especially for companies operating globally[1].
Additional Insights:
Start early: Don’t wait until year-end close to tackle these disclosures. Early preparation smooths the process and reduces pressure.
Leverage technology: Tax compliance and reporting software can be updated or configured to automate some of the data gathering and reporting.
Communicate with stakeholders: Inform your audit committee, auditors, and investors about changes in disclosures well in advance.
Consider early adoption if your entity can benefit from enhanced transparency sooner.
With ASU 2023-09’s compliance deadline approaching fast, preparing your financial statements with these practical steps will help ensure your reports meet the new income tax disclosure requirements fully and accurately, providing clearer insights for your stakeholders.