FASB Moves to Finalize ASU on Income Tax Disclosures

Michael Vinson, CPA-Houston

 

At a recent meeting, the Financial Accounting Standards Board (FASB) discussed its Improvements to Income Tax Disclosures project. In summary, the Board affirmed and clarified many of the items in the Proposed Accounting Standards Update (ASU) that was released in March 2023 and decided to move forward with the drafting of a final standard. 

 

The Board is issuing the amendments in this proposed update to enhance the transparency and decision usefulness of income tax disclosures. Investors, lenders, creditors and other allocators of capital (collectively, “investors”) have indicated that the existing income tax disclosures should be enhanced to provide information to better assess how an entity’s worldwide operations and related tax risks, tax planning, and operational opportunities affect its tax rate and prospects for future cash flows. Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities. While investors find these disclosures helpful, they suggested possible enhancements to better (1) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (2) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (3) identify potential opportunities to increase future cash flows.

 

The amendments in this proposed update would address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.

 

As a tax professional, you should begin thinking about the audit and non-audit clients for which you help prepare or review tax provisions under ASC 740. Many clients will need to assess the impact of the changing disclosure requirements and determine whether they may want to adopt the ASU early.