FASB’s ASU 2023-09: Transforming Income Tax Disclosures- Is Your Company Ready?

The Financial Accounting Standards Board (FASB) has significantly revamped income tax disclosure requirements through Accounting Standards Update (ASU) 2023-09, designed to enhance transparency and ensure investors have the necessary data to evaluate tax risks effectively. With these sweeping changes to ASC 740, companies face new complexities. Is your organization fully prepared?  Now is the time to evaluate the implications of ASU 2023-09 and its impact on your organization.

Key Changes Under ASU 2023-09

Enhanced Rate Reconciliation

Public Business Entities (“PBEs”) must now present a detailed reconciliation from statutory to effective tax rates, distinctly highlighting significant tax drivers such as:

• State and local taxes, net of federal impacts
• Foreign tax effects
• Effects of cross-border tax laws
• Impacts from enacted tax legislation
• Tax credits
• Change in valuation allowances
• Non-taxable or non-deductible items
• Changes in unrecognized tax benefits

These categories must be reported in both numerical amounts and percentages. Items that constitute 5% or more of the statutory rate multiplied by pre-tax income must be separately disclosed and discussed (e.g., for a US-based entity subject to the 21% statutory tax rate, any item that increases or decreases the tax rate by 1.05% or more).

This enhanced reconciliation isn’t just a compliance burden—it’s an opportunity to proactively communicate your tax narrative to company stakeholders.

Disaggregated Income Taxes Paid

All entities, including private companies, must disclose income taxes paid, net of refunds, broken down by federal, state, and foreign jurisdictions. Furthermore, taxes paid to any jurisdiction exceeding 5% of total taxes paid require separate disclosure. The 5% threshold is evaluated using the absolute value of the net refund or net payment in each jurisdiction compared to the absolute value of the total income taxes paid (net of refunds received).

Amendments to Other Disclosures

The amendments remove the requirement for entities to disclose either the expected changes in unrecognized tax benefits over the next 12 months or a statement indicating that such an estimate cannot be provided.

The amendments also eliminate the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to the comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

Spotlight on State and Local Disclosures

ASU 2023-09 introduces targeted requirements around state and local tax disclosures. Companies must now qualitatively describe significant jurisdictions contributing over half of the state and local effective tax rate impact. For example, if your company files across 50 states but most liabilities arise from six jurisdictions, your disclosure focuses on those six—avoiding unnecessary details while clearly presenting impactful information.

Early Adoption—What You Need to Know

While ASU 2023-09 becomes mandatory for PBEs for fiscal years starting after December 15, 2024, and for all others after December 15, 2025, early adoption is available immediately for financial statements not yet issued or made available for issuance. Entities can apply these disclosures prospectively or retrospectively, providing flexibility to best align with internal resources and investor communication strategies.

Choosing early adoption could signal to investors and stakeholders your proactive approach and commitment to enhanced financial transparency—potentially setting your firm apart in investor relations.

Preparing for Implementation

Implementing ASU 2023-09 effectively isn’t just about compliance—it’s a strategic move that can elevate stakeholder trust and confidence. Companies should:

• Assess and enhance current accounting systems and processes to capture detailed data required for these disclosures.
• Train and prepare finance and tax personnel to meet heightened reporting expectations.
• Develop a clear communication strategy to leverage new disclosure requirements in stakeholder relations.

How Centri Can Help

Navigating the complexities of ASU 2023-09 doesn’t have to be overwhelming. At Centri, we specialize in turning accounting challenges into strategic advantages. Our team is ready to:

• Guide your company through detailed, compliant, and strategic implementation of ASU 2023-09.
• Provide specialized training and system assessments to ensure seamless transition.
• Help craft strategic disclosures that clearly communicate your tax strategies and enhance your stakeholder reputation.

Centri’s Tax Advisory team is here to help you transform ASU 2023-09 from a compliance requirement into a strategic advantage. Contact us to start your proactive journey toward clearer, more impactful financial communication.