Struggles in Meeting FASB Income Tax Disclosure Requirements Remain Challenging

Struggles in Meeting FASB Income Tax Disclosure Requirements Remain Challenging

Unveiling the New Income Tax Disclosure Landscape

Here's a lowdown on the latest developments in income tax disclosures, as approved by the Financial Accounting Standards Board (FASB) on August 30. Public and private companies will, starting in 2025, reveal more intricate details about their tax situations.

Initially, U.S. companies' financial statements only provided a total cash tax they paid without breaking down the figures based on federal and state levels, or international jurisdictions. But now, the update mandates companies to detail their income tax payments, adjusted for refunds, annually to state, federal, and foreign taxing authorities.

If a company pays at least 5% of its total tax payments to a specific country or jurisdiction, it must disclose the country or state and the amount of tax paid.

Brett Weaver, partner and ESG tax leader at KPMG, commented, "This is a significant chapter in greater tax transparency."

Public companies will need to provide additional details, reconciling their domestic statutory and effective tax rates. These details include foreign tax effects, enactment of new tax laws, cross-border tax laws impact, tax credits, valuation allowances, and nontaxable or nondeductible items.

Weaver reiterated, "This is a significant chapter in greater tax transparency, something that ESG has been pressing for-more transparency around taxes, how companies determine taxes, and where they pay those taxes."

The FACT Coalition, an organization that tackles offshore tax abuses, summed up investor's need for information on the tax practices of companies within their portfolios, particularly multinational corporations.

However, a July letter penned to FASB Chair Richard Jones by Congressional Republicans deemed the update a "politicized effort to name-and-shame companies and influence tax policy." They asserted that the proposed disclosures might expose U.S. multinational entities to enhanced reviews and tax audits by foreign governments.

The update, first proposed in 2016, will see revisions from the March 2023 version, alleviating some requirements for companies. Reporting will now be annual instead of quarterly, with retrospective adoption (changes to prior period information) optional, and the effective date pushed back. In addition, it eases the disclosure on unrecognized tax benefits at the country level, potentially reducing foreign government audits, according to KPMG’s Weaver.

However, complying with the new rules won't be a walk in the park. With 2025 sounding far off, it's still a tight timeline, Weaver stated. He anticipates few companies to adopt early reporting as is customary with new accounting standards. Companies, in general, lack the processes to disclose this information accurately, and they don't have the controls over those processes in place currently, Weaver added.

One stumbling block for companies will be generating a "profit before income tax" number at a country level compatible with generally accepted accounting principles. "Most companies keep management books, and they roll that up to a U.S. GAAP consolidation," Weaver said.

Furthermore, the FASB accounting standards update, a revision to Topic 740, isn't happening in isolation. On a parallel deadline, the European Union has introduced the EU Public CbCR directive (country-by-country reporting). Public and private multinationals of a certain size will have to disclose revenue, profits, taxes, number of employees, assets, and other details.

As Weaver said, "If you layer [the FASB rules] with other required disclosures such as the EU CbCR, you will understand a company’s tax strategy very clearly."

Additional Insights

1. The key details and implications of the 2025 income tax disclosure update by the Financial Accounting Standards Board (FASB) for public and private companies can be summarized as follows:
2. Enhanced Disclosures: The update is designed to improve the clarity and usefulness of income tax disclosures while focusing on better insights into tax expenses[1]
3. Disaggregation Requirements: The update introduces the requirement for the disaggregation of income taxes into federal, state, and foreign taxes[1]
4. Qualitative Disclosures: There is a new requirement for qualitative disclosures about states contributing to the majority of state tax expense[1]
5. Effective Dates
   • Public business entities: effective for tax years beginning after December 15, 2024[5]
   • All other entities: effective in 2026[5]
6. These updates aim to improve the quality and transparency of financial reporting related to income taxes, which will benefit stakeholders, yet may require significant compliance efforts from companies[1][5]
7. The updates will provide more detailed information for financial analysis, potentially influencing how investors evaluate companies based on their tax strategies and liabilities[1]
8. Companies will need to comply with the new standards starting with their financial statements in 2025, while private companies will have an additional year to implement the changes[5]
9. The Financial Accounting Standards Board's (FASB) 2025 income tax disclosure update for public and private companies requires enhanced detailed disclosures about tax situations, focusing on clarity and insight into tax expenses.
10. This update introduces disaggregation requirements, mandating the disclosure of income taxes into federal, state, and foreign taxes.
11. There is a new requirement for qualitative disclosures about states contributing significantly to state tax expenses.
12. The effective dates for the update are as follows: public business entities - tax years beginning after December 15, 2024, and all other entities - 2026.
13. The updates aim to improve financial reporting quality and transparency, potentially benefiting stakeholders but requiring significant compliance efforts from companies.
14. The new standards will provide detailed information for financial analysis, potentially influencing how investors evaluate companies based on their tax strategies and liabilities.
15. Companies must comply with the new standards starting from their 2025 financial statements, while private companies will have an additional year for implementation.

Read also: