Preparing for the ASU 2023-09 income tax disclosures in your 2025 annual financial reports means embracing a significant shift in how income tax information is presented and communicated. This update by the Financial Accounting Standards Board (FASB) responds to investor demands for greater transparency and detailed insight into income tax risks, opportunities, and the geographic footprint of tax payments. To get ready, you’ll want to understand the key changes, how they affect your reporting processes, and practical steps to ensure smooth compliance.
At its core, ASU 2023-09 enhances disclosures around two main areas: the effective tax rate reconciliation and income taxes paid. Before this update, the rate reconciliation table and total income taxes paid in the cash flow statement gave investors a broad view, but the new requirements dig deeper into specifics, particularly regarding domestic versus foreign taxes and a more detailed breakdown of tax categories by jurisdiction[1][3].
One of the most important things to grasp is that the update applies to all entities following ASC 740, but the timing differs. Public business entities (PBEs) must apply the new rules for fiscal years starting after December 15, 2024—meaning your 2025 financial report is the first for calendar-year PBEs to incorporate these disclosures. Other entities get an extra year, so they adopt for fiscal years beginning after December 15, 2025, but early adoption is allowed for everyone[2][3].
So, what does this mean in practice? First, PBEs need to prepare a tabular reconciliation of the effective tax rate that breaks down the difference between the statutory tax rate and the actual tax expense. This isn’t just a simple number anymore; you’ll need to show amounts and percentages by specific categories, and for reconciling items that make up 5% or more of the statutory rate, you must provide further detail about their nature or jurisdiction. This level of granularity can be a big change if you’re used to more aggregated disclosures[3].
For example, suppose your company operates in multiple countries and states, and you have significant reconciling items such as foreign tax credits or state tax incentives. You’ll need to identify and disclose these items separately, explaining their impact on your effective tax rate. This approach helps investors and stakeholders understand exactly where tax risks and planning opportunities lie. Non-PBEs, on the other hand, provide qualitative disclosures instead of detailed tabular formats but still must describe the nature and effect of significant reconciling items by category and jurisdiction[2][3].
Another major requirement is the disaggregation of income taxes paid, which must be broken out between federal (or national), state/local, and foreign taxes. Furthermore, if any single jurisdiction accounts for 5% or more of your total income taxes paid, you must disclose amounts paid to that jurisdiction specifically. This transparency addresses a common question investors have: where exactly are you paying your taxes, and how does that impact your cash flows?[1][3][7]
To put this into perspective, imagine your company pays $10 million in income taxes worldwide. If your state tax payments total $700,000 (7% of total taxes paid), you must disclose that state as a separate line item in your income tax disclosures. This level of detail enables stakeholders to assess your tax exposure by geography, which is especially relevant in today’s environment where tax policies can shift rapidly across jurisdictions.
To prepare effectively for these changes, start by reviewing your current tax provision processes and disclosure controls. Here are some actionable steps to guide you:
Inventory your tax jurisdictions and reconcile tax payments: You need clear visibility into all jurisdictions where your company pays income taxes. Work closely with your tax department and accounting teams to gather accurate data on taxes paid, refunds received, and categorize them by federal, state, and foreign jurisdictions.
Enhance your data collection systems: Given the more detailed disclosure requirements, relying on manual spreadsheets may not be sustainable. Consider implementing or upgrading tax accounting software that can track tax expense and payments by jurisdiction, and generate the required disclosures efficiently.
Update your effective tax rate reconciliation process: Begin classifying reconciling items early, identifying which ones meet or exceed the 5% threshold. Prepare narratives or footnotes explaining the nature of these items and their impact on your tax rate.
Collaborate across departments: These disclosures will require input from tax, accounting, legal, and finance teams. Establish cross-functional working groups to align understanding and responsibilities well before the reporting period.
Assess materiality carefully: Although the ASU does not explicitly define materiality thresholds for these disclosures, the guidance reminds entities that immaterial items need not be separately disclosed. This means you’ll need to apply judgment considering both quantitative size and qualitative factors, balancing completeness with clarity[2].
Plan for transition disclosures: Since this is a new standard, your first year adopting ASU 2023-09 will require transition disclosures explaining how you implemented the changes and any significant impacts on your financial statements.
One practical example: a multinational corporation might find that foreign tax credits form a large reconciling item affecting its effective tax rate. Under ASU 2023-09, it must disclose the specific jurisdictions contributing to this credit and the effect on the tax rate reconciliation table. This transparency gives investors better insight into how foreign operations influence overall tax expense and future cash flow prospects[1][3].
Remember, these enhanced disclosures are not just about compliance; they are an opportunity to build trust with investors and stakeholders by providing a clearer picture of your tax strategy and risks. As many companies face increasing scrutiny around tax transparency, embracing the ASU 2023-09 requirements proactively can set you apart as a company committed to clear and responsible financial reporting.
In terms of timing, since your 2025 annual report is the first to include these disclosures for calendar-year PBEs, start your preparations now. Early testing of your new processes and draft disclosures will help identify gaps and smooth the way for a clean audit and confident reporting.
To sum up, preparing for ASU 2023-09 means:
Understanding the new detailed tabular and qualitative disclosures required,
Enhancing your data collection and reporting systems,
Engaging cross-functional teams to gather and verify data,
Applying thoughtful materiality judgments,
Communicating clearly through transition disclosures,
And viewing these changes as an opportunity to improve transparency and investor confidence.
Getting ahead of these changes today will save you time, reduce stress, and position your company as a leader in tax reporting excellence when you file your 2025 annual financial reports in 2026.