Preparing for the new FASB income tax disclosure rules coming into effect in 2025 can feel overwhelming for public company accounting teams, but with the right approach, you can navigate the changes smoothly. The updated guidance, issued as ASU 2023-09, introduces more detailed disclosure requirements around income tax rate reconciliations and income taxes paid, aiming to give investors clearer insight into a company’s tax situation[2][5][8]. Let me walk you through a practical, step-by-step guide to help your team get ready efficiently.
Start by getting a solid understanding of what’s changing. The new rules require more granular disclosures about how your effective tax rate differs from the statutory tax rate. This means breaking down tax expense and income by jurisdiction—federal, state, and foreign—and disaggregating income taxes paid. These changes respond directly to investor demands for transparency, especially for companies operating in multiple tax jurisdictions[2][5]. For example, if your company has significant foreign operations, you’ll now need to report income tax expense separately for each tax category, rather than lumping it together. This helps users of financial statements see exactly where tax risks and benefits are coming from.
Once you’re clear on the new requirements, conduct a gap analysis comparing your current income tax disclosures against the ASU 2023-09 standards. Identify where your existing financial reporting falls short in terms of disaggregation, reconciliation detail, and presentation. This exercise is crucial because it reveals exactly what processes and data you need to adjust or develop. You might discover, for example, that your current tax provision software doesn’t track income taxes paid by jurisdiction, which means you’ll need to work with IT or your tax software vendor to enhance reporting capabilities.
Next, involve the right people early in the process. This includes your tax department, financial reporting team, IT, and external auditors. Coordinating these groups ensures everyone understands the new disclosure expectations and can contribute their expertise. The tax team can provide detailed data by jurisdiction, accounting can oversee compliance with disclosure rules, and IT can help automate data collection and reporting. Don’t wait until the last minute—start these conversations well ahead of your first reporting deadline under the new standard, which for public business entities is annual periods beginning after December 15, 2024 (calendar year 2025)[2][8].
As you develop new or revised disclosures, apply sound judgment about materiality. The ASU doesn’t define materiality explicitly but notes that immaterial items don’t require separate disclosure even if they meet quantitative thresholds[2]. This means you’ll need to weigh both quantitative data and qualitative factors, such as whether a tax item could influence investor decisions. For example, a minor state tax expense may be immaterial on its own, but if it signals a broader tax risk in that jurisdiction, you might still disclose it. Developing clear internal guidelines for materiality judgments will streamline this process.
A practical tip is to create detailed templates for your rate reconciliation and income taxes paid disclosures. These templates should incorporate the required categories—federal, state, foreign—and allow for easy comparison period over period. Using standardized formats not only ensures compliance but also makes your disclosures more understandable and user-friendly for investors and auditors. For instance, your reconciliation might show the statutory tax rate, adjustments for foreign taxes, state taxes, tax credits, and other reconciling items, all clearly labeled and separated.
Testing your new disclosures early through mock financial statements or dry runs with your audit team is another key step. This helps identify gaps, timing issues, or data inconsistencies before your official filings. Involving auditors early also smooths the review process and reduces surprises during the actual audit. During these rehearsals, you might uncover, for example, that certain jurisdictions’ tax data isn’t available on time, prompting process improvements.
Since these new disclosures require more detailed data, automation and data management become critical. Look for ways to enhance your tax data systems to capture income tax expense and paid amounts by jurisdiction accurately and consistently. Automating calculations and reports reduces the risk of errors and manual rework, saving time in the long run. If your tax provision software needs upgrades or customization, start those conversations now.
Communication is also important beyond just the accounting and tax teams. Inform senior management about the new disclosure requirements, their implications, and any potential impact on financial statements or investor relations. Management should be prepared to discuss these disclosures with investors and analysts, as the enhanced transparency may prompt questions about tax strategies and risks. Preparing clear talking points that align with the disclosures helps present a consistent narrative.
Lastly, keep an eye on developments and emerging best practices. The FASB allows early adoption of ASU 2023-09, so some companies may file under the new rules ahead of schedule, offering practical examples to learn from[1][3]. Professional firms and industry groups will publish implementation guides and FAQs, which can provide valuable insights and practical tips. Participating in peer forums or tax accounting networks is a great way to share experiences and solutions.
To put it all together, here’s a quick checklist for public company accounting teams preparing for the 2025 FASB income tax disclosure rules:
Understand the new ASU 2023-09 disclosure requirements in detail, focusing on rate reconciliation and income taxes paid disaggregation.
Perform a gap analysis against current disclosures and identify process and data enhancements needed.
Engage cross-functional teams early, including tax, accounting, IT, and external auditors.
Develop clear materiality guidelines for disclosure judgments.
Create standardized templates for new disclosures covering federal, state, and foreign tax categories.
Conduct dry runs and audits of new disclosures before official filing deadlines.
Invest in automation and data management improvements for capturing tax information by jurisdiction.
Prepare senior management for investor communications regarding the enhanced disclosures.
Monitor industry updates, early adopters, and guidance from professional firms.
The FASB estimates that these changes will improve transparency for investors, making it easier to assess tax risks and opportunities in a company’s operations[5]. While the work to prepare can be significant, taking a methodical, team-based approach will help your company comply smoothly and demonstrate a commitment to high-quality financial reporting.
Remember, the goal is not just ticking a box but delivering disclosures that truly inform stakeholders. Approaching this as an opportunity to enhance your company’s transparency and credibility will pay dividends well beyond compliance deadlines. With the right preparation, your accounting team can lead the way in adapting to these important changes confidently and effectively.