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On December 14, 2023, the Financial Accounting Standards Board (FASB) released Accounting Standard Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures<\/em>.<\/a> The main purpose of this update is to enhance income tax disclosures for investors to better understand the effects of changes in jurisdictional tax code, assess cash flow forecasts, and identify potential to increase future cash flows.<\/p>\n This update is effective for public business entities (PBE) for annual periods beginning after December 15, 2024, and for all other entities with annual periods beginning after December 15, 2025. Additionally, early adoption is permitted for annual financial statements that have not been issued or made available for issuance. The amendments discussed below should be applied prospectively with retrospective application permitted. The disclosure requirements below are not applicable to non-public entities. Disclosure requirements for non-public entities are forthcoming and do not include tabular reconciliations as described below.<\/p>\n This ASU adds additional information required to be disclosed in the entity\u2019s financial statements. There is no change to the accounting for income taxes; this update is strictly a disclosure change. Entities will now be required to disclose a new rate reconciliation using both percentages and reporting currency amounts in a table as shown below. The categories required to be disclosed in this table are: state and local income tax (net of federal income tax), foreign tax effects, effect of changes in tax laws or rates enacted in the current period, effect of cross-border tax laws, tax credits, changes in valuation allowances, nontaxable or nondeductible items, and changes in unrecognized tax benefits. Disclosure is only required if the reconciling item is equal to or greater than 5% of income (loss) from continuing operations before taxes. Similarly, for foreign tax effects, anything less than 5% can be combined in an \u201cother foreign jurisdictions\u201d column. Specific to state and local taxes, net of federal income tax, separate disclosure is required if the states and localities make up more than 50% of the total category. This can be a qualitative description if the threshold is met.<\/p>\n In addition to the rate reconciliation table below, the FASB also added disclosures related to disaggregation of income taxes paid. For annual reporting periods, entities are required to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes. Similarly, entities are required to disclose the individual jurisdiction if the income taxes paid (net of refunds received) are equal to or greater than 5% of total income taxes paid (net of refunds received). There is no guidance on acceptable presentation of the disaggregation of income taxes paid.<\/p>\n Note X \u2013 Income Taxes<\/p>\n The Company accounts for income taxes under ASC 740, \u201cIncome Taxes,\u201d and is subject to U.S. federal income taxes, state income taxes, and foreign income taxes. The Company adopted ASU 2023-09, Improvements to Income Tax Disclosures<\/em>, on January 1, 2025. The following table presents a reconciliation of the U.S. federal statutory tax rate to the Company\u2019s effective income tax rate for the years ended December 31, 20X4 and 20X3.<\/p>\n <\/p>\n The Company paid income taxes, net of refunds, to the federal government in the amount of $27,000,000 and $13,000,000 for the years ended December 31, 20X4 and 20X3, respectively. Income taxes paid to the state of Virginia, net of refunds, amounted to $1,500,000 and $1,000,000 for the years ended December 31, 20X4 and 20X3, respectively. The Company had foreign operations in the United Kingdom resulting in foreign income taxes, net of refunds, of $3,850,000 and $1,425,000 for the years ended December 31, 20X4 and 20X3, respectively. No individual jurisdiction other than the federal, Virginia, and United Kingdom jurisdictions represented 5% or more of the total income taxes paid.<\/p>\n The FASB removed two major requirements for disclosure of unrecognized tax benefits and deferred tax liabilities. For unrecognized tax benefits, it is no longer required to disclose the nature and estimate of the range of reasonably possible changes to the unrecognized tax benefits balance in the next 12 months or to make a statement that an estimate of range cannot be made. Additionally, the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized was removed.<\/p>\n Ensure your financial statements are in compliance with the new rate reconciliation requirements by inserting the example note above. If you have any questions, contact Keiter\u2019s Financial Services Team<\/a> |\u00a0Email<\/a> | Call 804.747.0000 for more information.<\/p>\n Source:<\/strong> FASB Accounting Standards Update (ASU) No. 2023-09, Improvements to Income Tax Disclosures<\/em><\/a><\/p>\nEffective dates<\/h3>\n
New disclosure requirements under Topic 740<\/h3>\n
Example: Income tax disclosure for public business entities<\/h3>\n
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\n \n\n Year Ended December 31, 20X4<\/th>\n \n Year Ended December 31, 20X3<\/th>\n \n<\/tr>\n<\/thead>\n \n \n Amount<\/td>\n Percent<\/td>\n Amount<\/td>\n Percent<\/td>\n<\/tr>\n \n US Federal Statutory Tax Rate<\/td>\n $21,000,000<\/td>\n 21.0%<\/td>\n $10,500,000<\/td>\n 21.0%<\/td>\n<\/tr>\n \n State & local taxes, net of federal income tax effect<\/td>\n 2,500,000<\/td>\n 2.5<\/td>\n 1,250,000<\/td>\n 2.5<\/td>\n<\/tr>\n \n Foreign tax effects<\/td>\n \n \n \n \n<\/tr>\n \n United Kingdom<\/span><\/td>\n \n \n \n \n<\/tr>\n \n Statutory tax rate difference between United Kingdom and United States<\/span><\/td>\n 4,000,000<\/td>\n 4.0<\/td>\n 1,500,000<\/td>\n 3.0<\/td>\n<\/tr>\n \n Share-based payment awards<\/span><\/td>\n 250,000<\/td>\n 0.3<\/td>\n 125,000<\/td>\n 0.3<\/td>\n<\/tr>\n \n Research and development tax credits<\/span><\/td>\n 100,000<\/td>\n 0.1<\/td>\n 50,000<\/td>\n 0.1<\/td>\n<\/tr>\n \n Other<\/span><\/td>\n (500,000)<\/td>\n (0.5)<\/td>\n (250,000)<\/td>\n (0.5)<\/td>\n<\/tr>\n \n Effect of changes in tax laws or rates enacted in the current period<\/td>\n –<\/td>\n –<\/td>\n –<\/td>\n –<\/td>\n<\/tr>\n \n Effect of cross-border tax laws<\/td>\n 150,000<\/td>\n 0.1<\/td>\n 75,000<\/td>\n 0.1<\/td>\n<\/tr>\n \n Tax credits<\/td>\n (1,000,000)<\/td>\n (1.0)<\/td>\n (500,000)<\/td>\n (1.0)<\/td>\n<\/tr>\n \n Nontaxable or nondeductible items<\/td>\n 1,000,000<\/td>\n 1.0<\/td>\n 500,000<\/td>\n 1.0<\/td>\n<\/tr>\n \n Changes in unrecognized tax benefits<\/td>\n (500,000)<\/td>\n (0.5)<\/td>\n (250,000)<\/td>\n (0.5)<\/td>\n<\/tr>\n \n Income tax expense<\/strong><\/td>\n $27,000,000<\/td>\n 27.7%<\/td>\n $13,000,000<\/td>\n 26.7%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Removal of two major requirements<\/h3>\n
Preparing for implementation: Next steps<\/h3>\n