As financial reporting teams gear up for 2025, one significant update to prepare for is the Financial Accounting Standards Board’s (FASB) new requirements on income tax disclosures under ASU 2023-09. These amendments are designed to provide investors and other stakeholders with clearer, more detailed information about an entity’s income tax position, helping them better understand risks, opportunities, and cash flow impacts related to tax matters. If your team hasn’t started prepping yet, it’s time to get serious — the changes are comprehensive and will require thoughtful adjustments to processes and controls.
The core purpose behind these new disclosures is transparency. Investors want to see more than just the bottom-line tax expense; they want to understand the factors driving differences between an entity’s effective tax rate and the statutory tax rate, as well as how much income tax is actually being paid in various jurisdictions. The amendments affect all entities subject to ASC 740 but are effective first for public business entities (PBEs) starting with annual periods after December 15, 2024 — that means calendar-year PBEs will report these changes in their 2025 filings. Other entities have an extra year but early adoption is allowed, so getting ahead is wise[1][2][3].
One of the biggest shifts is in how entities must present and disaggregate their income tax information. The ASU requires a more granular breakdown of the income tax rate reconciliation. Instead of a single catch-all reconciling item, entities must disaggregate reconciling items by nature whenever those items meet or exceed a 5% threshold of the income before tax multiplied by the statutory federal rate. This means your finance team needs to review all reconciling items carefully and group similar items to see if they cross this threshold individually or collectively. If so, those items must be disclosed separately. For example, if your company has significant tax credits or state tax impacts, these will likely need their own line items in the reconciliation[1][2].
Another key requirement is the annual disclosure of income taxes paid, net of refunds received, disaggregated by federal (or national), state, and foreign jurisdictions. This includes breaking out jurisdictions that represent 5% or more of total income taxes paid. For companies operating in multiple states or countries, this can be complex. It’s not just about reporting aggregate taxes but showing exactly where the cash tax payments are flowing. For instance, a multinational might need to disclose separately the taxes paid in the U.S., Germany, and Brazil if each crosses the 5% threshold. This helps users of financial statements better assess cash flow forecasts and capital allocation decisions[3][4].
The new disclosures also extend to the presentation of income (or loss) from continuing operations and the related income tax expense, which must be disaggregated between domestic and foreign components. This further breakdown aligns tax expense information with geographic operational results, providing a clearer picture of tax impacts in each major jurisdiction[3].
From a practical standpoint, preparing for these disclosures means financial reporting teams should:
Assess existing processes and data collection: Can your current systems capture the necessary tax payment data by jurisdiction? Do you have a reliable method to identify and categorize reconciling items that meet the 5% threshold? Many teams will need to enhance or implement controls to gather, validate, and report this information accurately[1][2].
Engage with tax and legal departments: Collaboration is essential since tax personnel often have the deepest knowledge about the nature of reconciling items and tax payments by jurisdiction. Early coordination will help ensure accuracy and completeness[1].
Evaluate materiality carefully: The ASU does not explicitly define materiality for these disclosures, but it confirms that immaterial items can be excluded even if they meet the quantitative threshold. This means judgment is needed considering both quantitative size and qualitative importance. For example, a reconciling item representing 6% of the threshold but with limited economic impact might be excluded, while a smaller but strategically important item might warrant disclosure[2].
Plan for enhanced documentation: With more detailed disclosures comes a higher expectation for documentation supporting judgments and calculations. This is crucial for audit readiness and to withstand scrutiny from regulators and investors[1][2].
Communicate changes to stakeholders: Investors and analysts will expect more detailed explanations in your financial statements. Prepare clear, concise narratives to accompany the disclosures, focusing on what drives the tax rate differences and the significance of tax payments by jurisdiction[3].
To illustrate, imagine a publicly traded company with operations in the U.S., Canada, and the U.K. Under the new rules, they would need to:
Break down their income before tax into domestic (U.S.) and foreign (Canada and U.K.) components.
Present income tax expense by federal (U.S.), state (U.S. states), and foreign jurisdictions (Canada and U.K.).
Disaggregate reconciling items such as tax credits, state taxes, and foreign tax rate differences if they exceed the 5% threshold.
Disclose income taxes paid in each jurisdiction, net of refunds, including separate line items if any jurisdiction represents 5% or more of total tax paid.
This level of detail not only improves transparency but can also shed light on tax planning strategies and potential risks, such as exposure to changes in foreign tax laws.
From an organizational standpoint, these disclosures will likely lead to closer integration of tax and finance teams and may require investments in tax technology to automate data collection and reporting. According to EY’s guidance, companies should evaluate whether they need to modify existing processes or create new controls to comply effectively[1].
The benefits of embracing these changes early go beyond compliance. Enhanced income tax disclosures can build investor confidence by demonstrating robust governance and transparency around a complex and often misunderstood area of financial reporting. They also facilitate better internal decision-making by highlighting tax-related cash flow impacts and risks more clearly.
In summary, the FASB’s new income tax disclosure requirements represent a significant shift in how companies communicate their tax positions. They demand more detailed, disaggregated information about tax rate reconciliations, tax payments by jurisdiction, and income tax expense components. Preparing for these changes requires careful planning, cross-department collaboration, and potentially upgrading systems and controls. By tackling these challenges proactively, financial reporting teams can not only meet regulatory demands but also provide valuable insights to investors and enhance the quality of their financial reporting.