It’s time to prepare your business for a recent turn in the tax maze: new tax accounting standards for income issued by the Federal Accounting Standards Board (FASB) in December of 2023. Public companies must comply with ASU 2023-09, Improvements to Income Tax Disclosures for annual periods beginning after December 15, 2024. For private companies the standard goes into effect a year later, but don’t delay. You need this time to get ready.
ASU 2023-09 applies to companies of every size. If your organization has to pay business tax on income, you need to understand the new rules — and following them could yield tax benefits beyond avoiding noncompliance penalties.
New accounting standards mean changes for business accounting. ASU 2023-09 imposes a new requirement to include additional disclosures about an organization’s income tax in financial statements. The goal is to give investors and other stakeholders a better understanding of the company’s tax exposure and potential tax-associated risks.
The update requires all businesses to present a breakout of income taxes paid by jurisdiction, which will be a significant change for most companies. You’ll also need to provide a qualitative explanation of your effective tax rates in each jurisdiction.
Both public and private businesses must disclose in financial statement footnotes:
For public companies, ASU 2023-09 requires the disclosures to include a table comparing the statutory and effective tax rates paid.
You’ll need to make sure that the company’s financial statements include disaggregated data and a qualitative explanation for each of these categories:
Additionally, public entities must provide a qualitative disclosure to explain the impact, nature and causes of individual reconciling items — and the reasoning behind how you chose to categorize them, if you had to make a judgment call.
Nonpublic entities don’t have to present the numerical reconciliation that ASU 2023-09 requires from public companies. However, private companies must include a qualitative disclosure addressing the difference between the statutory tax rate and the organization’s effective tax rate. You’ll need to provide this information for each jurisdiction, broken down into the same categories of reconciling items that public companies must disclose.
New regulations that require accounting changes typically inspire lots of questions. To help you get ahead of the new rules, here’s a look at some common queries we’re hearing from CFOs and other business leaders.
Q: How big of a change does the update really represent?
A: Depending on the nature of your business, compliance with ASU 2023-09 could be anything from a nothingburger to a major undertaking. Generally speaking, businesses that incur income tax liability in more jurisdictions will be most heavily impacted — whether you’re leading a domestic company with nexus in multiple states or a multinational company with revenue sourced around the globe.
Your relative difficulty in accessing disaggregated data is another key controlling factor. If your company doesn’t currently collect this type of information, compliance will pose more of a challenge.
If your business has income in only one tax jurisdiction, ASU 2023-09 should have minimal impact. Likewise, if your accounting processes already generate the information required for disclosure. Companies with advanced tax and accounting software, such as an enterprise resource planning (ERP) system, typically already have or can easily access the needed information.
The bottom line: if you have income tax liabilities in multiple jurisdictions or use spreadsheets to track tax and revenue data, you should plan to devote significant resources for compliance.
A: The potential barriers to compliance revolve around two main factors:
If your business relies on spreadsheets, you may face significant challenges in obtaining the jurisdiction-level data you need.
Private companies should also consider the difficulty of calculating and explaining the effective tax rate. Multiple factors can influence your calculations, and teasing out the various impacts can be tricky. For example, these are just a few of the things that impact your effective tax rate:
Evaluating all the potential factors now will help you make accurate disclosures once the ASU takes effect.
Q: Where do I find the information that ASU 2023-09 requires for disclosure?
A: If you use accounting software that already collects this information, you should be able to include it in your financial statements with little difficulty. However, you may need to dig into the software to find it. Even if your system can show you disaggregated data, you may need to change certain settings to access it or run specific reports that will generate the information. Some companies that use spreadsheets may also have the ability to see disaggregated data.
Q: What if the required information doesn’t exist?
A: Many businesses — especially those using spreadsheets for accounting — don’t currently collect the disaggregated information needed for the ASU 2023-09 disclosures. If your organization isn’t currently collecting this data, it’s especially important that you begin working through the steps to compliance now, rather than waiting until the update takes effect.
Q: What should I do now to be ready for compliance with ASU 2023-09?
A: All public and private businesses should begin modeling the new jurisdictional tax disclosure requirements. If you already generate disaggregated tax data or your accounting package can do so easily, begin including this information in your reporting. Having a few months to work through the process will help you identify potential data gaps and adjust your reporting and financial statements as needed.
If your accounting doesn’t currently track disaggregated income tax information, mapping your path to compliance is an urgent priority. Investing in accounting software that can automatically generate disaggregated data is one option that’s effective and relatively easy to implement. But this can be costly, so it may not be the best choice for every business.
Start by setting up separate general ledger accounts for all material tax jurisdictions. This will make the data accessible, allowing you to track taxes paid, receivables, liabilities and other relevant data so you can make the appropriate disclosures.
Q: How will compliance with ASU 2023-09 benefit my business?
A: Besides avoiding potential consequences of noncompliance, here’s how the steps you take to comply with ASU 2023-09 can enhance your business performance:
As you’re getting ready to meet the updated accounting standards, this handy seven-point checklist can help you work through the process and see where you stand.
It may take longer than you think to get the data you need to comply with ASU 2023-09. The key to avoiding last-minute stress (and noncompliance) is to get started now. Want to prevent missteps and streamline your path? Find out how Armanino’s tax consultants can help you deploy the most effective and efficient strategy for modeling and implementing the new requirements.
Get a free one-on-one consultation to assess your needs and next steps to help you reach your strategic tax goals.
