In 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, (the Update) which applies to any entity subject to income taxes. The Financial Accounting Standards Board issued this Update to enhance transparency and improve effectiveness of income tax disclosures. More specifically, the revised disclosure requirements provide for more detailed information by tax jurisdiction and remove certain disclosures that are no longer considered relevant. The Update also includes several provisions specific to public business entities, which are not in the scope of this blog.

Disclosures

The amendments in the Update include new quantitative and qualitative disclosures and revise disclosures related to unrecognized tax benefits for annual reporting periods. See below for more information.

Quantitative Disclosures
The amendments in this Update will require the following items to be disclosed either in the statement of operations or in the financial statement footnote disclosures for each annual reporting period:

• Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign tax jurisdiction; and
• Income tax expense (or benefit) from continuing operations disaggregated by federal, state and foreign tax jurisdiction. Include any income taxes on foreign earnings imposed by the jurisdiction of domicile within the amount for that jurisdiction of domicile (that is, the jurisdiction imposing the tax)

Qualitative Disclosures
As previously mentioned, public business entities are subject to additional disclosures that other nonpublic business entities are not. One of these differences is that public business entities are required to disclose numerical information, in a table, showing how the entity reconciles its statutory tax rates to its effective tax rate.  This quantitative disclosure is not required of entities that are not public business entities. Instead, private companies and not-for-profit organizations will be required to disclose a description of the nature and effect of specific categories of reconciling items and individual tax jurisdictions that result in a significant difference between the entity’s statutory tax rate and its effective tax rate. The specific categories are as follows:

• State and local income tax, net of federal income tax effect;
• Foreign tax effects;
• Effects of changes in tax laws or rates enacted in the current period;
• Effect of cross-border tax laws;
• Tax credits;
• Changes in valuation allowances;
• Nontaxable or nondeductible items; and
• Changes in unrecognized tax benefits

Unrecognized Tax Benefit Related Disclosures
The amendments in this Update also remove certain disclosure requirements relating to unrecognized tax benefits. Prior to the effective date of this Update, all entities are required to make certain disclosures related to positions for which is it reasonably possible that the total amounts of unrecognized tax benefits will significantly change within twelve months of the reporting date.  The amendments in this Update remove those disclosure requirements. Entities will still be required to disclose the total amounts of interest and penalties recognized in the statement of operations and statement of financial position and a description of tax years that remain subject to examination by major tax jurisdictions.

Statement of Cash Flows

The amendments in the Update also add certain disclosure requirements related to the statement of cash flows and disaggregation by tax jurisdiction.

The amendments in the Update require that entities disclose the (cash) amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdictions.  

In addition, if the entity pays income taxes to, or receives income tax refunds from, any individual jurisdiction that is equal to or greater than 5% of the entity’s total income taxes paid, net of refunds received, then it must disclose the (cash) amount of income taxes paid, net of refunds received, to that specific individual jurisdiction. Please note that this new 5% disclosure requirement is likely to apply to entities that pay income taxes to more than one state.

Effective Date and Transition

For private companies and not-for-profit organizations, the amendments in the Update are effective for annual periods beginning after December 15, 2025. Early adoption is permitted.

The amendments in the Update shall be applied on a prospective (going forward) basis. However, retrospective application is permitted for each comparative period presented in the financial statements.

Planning for Effective Date

The amendments in this Update will require additional income tax information for the new financial statement disclosure requirements. As such, preparers of the financial statements may need to increase communication with the entity’s tax service provider and enhance related income tax information requests.

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