FASB Approves More Detailed Income Tax Reporting Standard for Public and Private Companies by Brent Leslie, CPA
Posted on October 31, 2023
by
Brent Leslie
The Financial Account Standards Board (FASB) recently voted to approve a new accounting standard that will require U.S. businesses to disclose significantly more details about their global income tax liabilities beginning as early as 2025. The move is a part of the FASB’s larger effort to improve the effectiveness of disclosures in the financial statement notes of public companies, private businesses and non-profit organizations.
Currently, public companies operating under the U.S.’s Generally Accepted Accounting Principles (GAAP) must, at a minimum, annually report the total amount of income tax they paid each year, their total pretax net income for domestic and foreign operations and their effective tax rates, which is the ratio between their tax expense and their pretax income. According to the FASB, this high level of information disclosed at the bottom of the companies’ statement of cash flows or in the footnotes fails to provide investors and other readers of an entity’s financial statements with a clear picture of a business’s current and projected income tax risks and opportunities, its cash flow and its asset allocations.
Under the FASB’s Accounting Standards Update, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, public companies will face more transparent and more frequent tax reporting requirements beginning in 2025, including granular details about the profits they earn and the taxes they pay broken down by business activity and jurisdiction (i.e., federal, state or foreign country.) For example, when the taxes a company pays to a particular jurisdiction represent more than 5 percent of its total taxes for the year, it will have to identify that jurisdiction and specify the amount paid in its annual reports. It will also have to report the statutory tax rate in effect for each jurisdiction and the actual rate it pays based on tax treaties and other factors. Consequently, companies will need to disaggregate their rate reconciliations into separate categories rather than reporting one lump sum amount. Privately held companies will have an additional year to comply with the updated standard, giving them until 2026 to adapt the new reporting requirements.
About the Author: Brent Leslie, CPA, is a director of Assurance and Advisory Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with domestic and international clients on a broad range of transactions, helping them navigate a complex accounting compliance environment. He can be reached at the firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbcpa.com.
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