1. The Accounting Standards Codification is amended as described in paragraphs 2–10. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and deleted text is

struck out

.

2. Supersede the following Master Glossary terms from Subtopic 740-10, with a link to transition paragraph 740-10-65-9, as follows:

BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC2. The Board is issuing the amendments in this Update to enhance the transparency and decision usefulness of income tax disclosures through improvements to the rate reconciliation and income taxes paid disclosures. Those improvements are expected to better meet the information needs of investors in making capital allocation decisions.

BC3. The Board previously considered amendments to the disclosure requirements in Topic 740 as part of the disclosure framework project (resulting in the issuance of Chapter 8, Notes to Financial Statements, of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, in August 2018) to improve the effectiveness of disclosures about income taxes. As a result, the Board first issued proposed Accounting Standards Update, Income Taxes (Topic 740): Disclosure Framework—Changes to the Disclosure Requirements for Income Taxes, in 2016. On the basis of comment letter feedback received as well as the enactment of Public Law 115-97, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), the Board issued the 2019 revised proposed Accounting Standards Update, Income Taxes (Topic 740): Disclosure Framework—Changes to the Disclosure Requirements for Income Taxes. The amendments in both proposed Updates would have made detailed changes to the disclosure requirements in Topic 740, in accordance with the concepts in Chapter 8 of Concepts Statement 8. However, there was a lack of general support for the amendments in those proposed Updates, and investors noted that the proposed amendments did not, in their view, provide necessary decision-useful information for their capital allocation decisions because those proposed amendments did not focus on providing a top-down analysis of an entity’s income tax rate and its significant drivers.

BC4. During the outreach conducted to develop the Invitation to Comment, Agenda Consultation (2021 ITC), investors reiterated their request for more disaggregated income tax information, particularly jurisdictional information. To solicit broad stakeholder feedback on the topic of disaggregated income tax disclosures, the following paragraphs were included in the 2021 ITC, which was issued for comment on June 24, 2021:

BC5. Investors that use the financial statements and footnotes when making capital allocation decisions expressed the view that the transparency provided by current income tax disclosures should be enhanced to provide investors with information to better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. On the basis of that view, the Board decided to refocus the existing income tax disclosure project to better align with investor input and revised the project objective to improve transparency and decision usefulness of income tax disclosures by making improvements to the rate reconciliation and income taxes paid information. While other interested parties (such as taxing authorities, public interest groups, and members of the public other than investors) requested that the project be expanded to include other focus areas, the Board noted that this project is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions and is not intended to address the more general informational requests of other parties.

BC6. On March 15, 2023, the Board issued the proposed Accounting Standards Update, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, for public comment with the comment period ending on May 30, 2023. The Board received 60 comment letters in response to the proposed Update. Overall, many comment letter respondents expressed support for the amendments in the proposed Update, noting that the proposed amendments (a) would improve the transparency, consistency, and decision usefulness of income tax disclosures and (b) were clear and operable. While those respondents expressed general or overall support, they also provided suggestions on various areas for further improvement or clarification.

BC7. During the exposure period, additional outreach was conducted with investors that use the financial statements and footnotes when making capital allocation decisions. Investors generally supported the amendments in the proposed Update, noting that the additional detail provided on reconciling items in the rate reconciliation and the further break down of income taxes paid by jurisdiction would help them better understand an entity’s tax position and exposure, ask more informed questions, or corroborate information provided by management and better assess an entity’s effective tax rate and prospects for future cash flows. The consistent support from investors led the Board to move forward with finalizing the amendments in this Update.

BC8. The Board considered stakeholder feedback on various areas for further improvement or clarification in reaching the conclusions in this Update, as discussed below.

BC9. The objective of financial reporting is to provide information that is useful to present and potential investors, lenders, creditors, and other allocators of capital (collectively, “investors”) and donors in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, donors, and other allocators of capital benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.

BC10. Overall, the Board concluded that the expected benefits of the amendments in this Update justify the expected costs. The amendments benefit investors by providing disaggregated information, including jurisdictional information related to the rate reconciliation and income taxes paid and more detailed information about the nature of the items in the rate reconciliation, thereby enhancing the transparency and decision usefulness of income tax disclosures. Specifically, the combination of improved rate reconciliation disclosures and information about income taxes paid by jurisdiction provides investors with a better understanding of an entity’s income tax provision and related risks and opportunities. Furthermore, the additional disaggregation of income tax information provides investors with relevant information in understanding an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, assessing the effect on cash flow forecasts and capital allocation decisions, and identifying potential opportunities to increase future cash flows. This information will assist in driving efficient investment and capital allocation decisions.

BC11. The Board does not anticipate that entities will incur significant costs as a result of the amendments in this Update. The Board acknowledges that entities likely will incur increased costs (including costs related to additional processes, systems, and controls) to gather, accumulate, and report the incremental information. However, the disclosures consist of information that underlies an entity’s calculation of its tax provision or is included in the detail of its tax payments. In addition, preparers and practitioners have indicated that the information either is readily available or could be acquired via existing processes or systems without significant changes or significant operability challenges.

BC12. Some stakeholders raised the concern that providing disaggregated rate reconciliation and income taxes paid disclosures, particularly jurisdictional information, may result in adverse consequences, including competitive disadvantages and unintended regulatory scrutiny. Feedback received from comment letter respondents indicated that their most significant concern was about providing certain jurisdictional information related to the proposed amendment to disclose changes in unrecognized tax benefits by jurisdiction. The Board considered this feedback, as well as feedback received from investors stating that they primarily use this disclosure to evaluate how an entity assesses its tax positions and that disclosure of an aggregate amount is generally sufficient for their analyses. Considering the feedback and observing that this issue also was specifically addressed in the development of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, the Board decided to permit entities to aggregate changes in unrecognized tax benefits for all jurisdictions. With this significant concern about the disclosure of jurisdictional information being addressed, the Board notes that the additional disaggregated information required by the amendments in this Update is at a sufficiently high level to diminish the concerns about competitive information being made broadly available, while also recognizing that many taxing authorities, including those in the United States, already accumulate detailed jurisdictional and other tax information well beyond the required disclosures. While those concerns appear to be largely mitigated, the Board concluded, and investors communicated, that the beneficial consequences of providing more disaggregated income tax information for investors to make better informed capital allocation decisions exceed the potential costs.

BC13. In summary, the Board decided that information provided by the amendments in this Update strikes a reasonable balance between meeting investors’ needs for more disaggregated income tax information and addressing stakeholders’ concerns about the costs of providing the information.

BC14. The amendments in this Update address investors’ requests for greater transparency about income tax information, including jurisdictional information, through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid.

BC15. This Update also includes certain other amendments to improve the effectiveness and comparability of income tax disclosures.

BC16. The Board considered but decided not to address the following:

BC17. The Board also considered but decided not to address certain other requests raised in comment letters for various additional changes (for example, to require a reconciliation of income tax expense to income taxes paid, to require a reconciliation of GAAP income to taxable income, or to provide guidance on the accounting for and presentation of refundable and transferrable income tax credits). The Board noted that those requests are broader than the established scope of the income tax disclosure project and if addressed as part of this project could significantly delay the benefits to investors from the issuance of the disclosure enhancements in this Update.

BC18. In the Board’s view, the rate reconciliation is one of the most useful tax disclosures to provide investors with an understanding of an entity’s income taxes, including transparency into income tax risks and opportunities. Therefore, the Board decided to add a disclosure objective to the guidance and prescribe the disaggregation of information presented in the rate reconciliation. The Board expects that the amendments in this Update will enhance the transparency, comparability, and consistency of the disclosed information.

BC19. The Board decided to require that public business entities provide on an annual basis a tabular rate reconciliation (using both percentages and reporting currency amounts) that contains specific categories and provides additional information for any reconciling item (within certain categories) that is equal to or greater than a specified quantitative threshold, in accordance with paragraphs 740-10-50-12A through 50-12C.

BC20. The Board expects that requiring specific categories in the rate reconciliation and further disaggregated information of reconciling items within certain categories will enable investors to better understand tax variability driven by the different nature of reconciling items or taxing jurisdictions and therefore to better assess (a) the sustainability of effective tax rates over time, (b) the opportunity to improve cash flows, and (c) the reasons for differences in effective tax rates across entities.

BC21. Stakeholders (including investors, advisory groups, and comment letter respondents) generally supported the Board’s decision to require, in a tabular rate reconciliation, specific categories and disaggregated information of reconciling items within certain categories. Most comment letter respondents noted that the standardization of the categories in the rate reconciliation will promote disclosure consistency and comparability. Investors observed that the improvements to the rate reconciliation will provide important information to better understand the factors that affect an entity’s tax rate (including nonrecurring items), assess the sustainability of an entity’s tax rate, evaluate how jurisdictional tax risks and opportunities affect an entity’s operating cash flows, and promote more informed discussions with management. Investors stated that they use both percentages and amounts in their analyses, and other stakeholders indicated that it is not costly for entities to provide both pieces of information.

BC22. A number of stakeholders requested that the Board clarify whether (and how) materiality should be considered when evaluating whether reconciling items that meet the quantitative threshold are required to be disclosed. The Board observed that the guidance in paragraph 105-10-05-6, which states that the provisions of the Codification need not be applied to immaterial items, is applicable to the amendments in this Update, as it is to all Codification guidance. Therefore, the amendments on the disclosure of reconciling items by specific categories with further disaggregation of reconciling items based on the application of a quantitative threshold do not apply to immaterial items. That is, an entity does not need to separately disclose the required specific categories or reconciling items if they are immaterial, even if the quantitative threshold is met.

BC23. Other stakeholders suggested that the Board include guidance related to materiality in Topic 740 on income tax disclosures. They noted that the amendments in the proposed Update were unclear on whether an entity would be required to separately disclose each of the eight categories regardless of materiality.

BC24. The Board considered the feedback but decided not to add a discussion of materiality to the guidance in Topic 740 because the materiality guidance in paragraph 105-10-05-6 applies to all Topics. The Board was concerned that replicating the materiality guidance in some Topics and not others could lead to unnecessary confusion and potential inconsistency in practice. Therefore, the Board decided that it is appropriate to retain the discussion of materiality in the basis for conclusions with a clear reference to Topic 105, Generally Accepted Accounting Principles.

BC25. The Board considered whether it was necessary to define the specific categories included in paragraph 740-10-50-12A(a). In the proposed Update, the Board decided that defining the specific categories would not be necessary because the categories are understandable, currently used in practice, and intended to be general to accommodate future changes to the tax environment. Most stakeholders agreed that the required specific categories are understandable, reasonable, and generally consistent with those already presented in the rate reconciliation by many public business entities. However, some stakeholders suggested that the Board explain or clarify the intent of certain specific categories to provide a better understanding and a more consistent application of the guidance. To further enhance the clarity and operability of the guidance, the Board decided to make the following clarifications to specific categories in response to stakeholder feedback:

BC26. Stakeholders expressed concern about disclosing the unrecognized tax benefits by jurisdiction, noting that it could pose financial risks to entities or provide prejudicial information to taxing authorities in individual jurisdictions, without a commensurate benefit for investors. They noted that the Board acknowledged this risk in the 2016 proposed Update and that the existing disclosure guidance in paragraphs 740-10-50-15 through 50-15A also provides investors with information about an entity’s unrecognized tax benefits. Therefore, stakeholders suggested that the Board allow entities to aggregate disclosure of changes in unrecognized tax benefits for all jurisdictions. When discussing this feedback, the Board acknowledged the concern raised by stakeholders and decided to permit entities to aggregate the disclosure of changes in unrecognized tax benefits for all jurisdictions. The Board concluded that the aggregated disclosure is consistent with previous decisions made by the Board on unrecognized tax benefits in Topic 740 and provides incremental information to investors.

BC27. The Board considered but decided not to make further suggested changes to other specific categories, including addressing requests to allow entities to disclose valuation allowances on an aggregated basis for all jurisdictions.

BC28. The Board concluded that, except for the tax effects related to changes in unrecognized tax benefits, all income taxes imposed by (a) states and local jurisdictions and (b) foreign jurisdictions are required to be captured in the state and local income tax and foreign tax effects categories, respectively. For example, the tax effects of a new tax law enacted by a foreign jurisdiction, a tax credit granted by a foreign jurisdiction, or state or local taxes within a foreign jurisdiction are required to be included in the foreign tax effects category. Accordingly, the remaining specific categories other than the changes in unrecognized tax benefits category reflect the effect of taxes in an entity’s jurisdiction (country) of domicile.

BC29. The Board acknowledges that the specific categories included in paragraph 740-10-50-12A(a) may not cover all income tax effects and judgment may need to be applied when determining how to categorize certain income tax effects that do not clearly fall into a single category. The Board also acknowledges that judgment may be necessary when determining how to categorize certain income tax effects that have characteristics of multiple categories or when assessing the nature of reconciling items for further disaggregation in paragraph 740-10-50-12A(b). In situations in which judgment has been applied, the Board noted that an entity should assess whether the disclosure objective in paragraph 740-10-50-11A is met. An entity also should consider whether an accompanying explanation is needed in accordance with paragraph 740-10-50-12C. For example, an entity may decide to include the tax effects of share-based payment awards (such as nondeductible expenses, shortfalls, and windfalls) in the nontaxable or nondeductible items category, although the windfall on a standalone basis might not be viewed as exclusively relating to this category. In that situation, the entity should consider providing an accompanying explanation to describe the types of tax effects of share-based payment awards (including windfalls) that are included in the nontaxable or nondeductible items category.

BC30. The tabular rate reconciliation disclosure in paragraph 740-10-55-231 includes tax effects related to global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT), and foreign-derived intangible income (FDII) in the cross-border tax laws category. The Board received feedback that the illustration should not include FDII in the cross-border tax laws category because some stakeholders view FDII as a special deduction rather than a cross-border tax law. The Board considered the feedback but retained the reference to FDII in the illustration under the effect of cross-border tax laws category to provide a more consistent disclosure of that information. However, the Board acknowledges that judgment may be necessary when identifying the reconciling items to be included in this category, including the categorization of special deductions such as FDII, for both U.S.-domiciled entities and entities domiciled in a foreign jurisdiction.

BC31. The Board also considered but decided not to provide specific guidance on where other reconciling items, such as proportional amortization and tax effects of significant transactions and business events, should be categorized. The Board noted that an entity will need to use judgment to determine to which specific category a reconciling item relates. If the entity decides that the reconciling item does not fall into any specific category, the entity is required to disclose the reconciling item separately as other adjustments in the rate reconciliation if it meets the 5 percent threshold in accordance with paragraph 740-10-50-12A(b)(3).

BC32. Comment letter respondents noted that some reconciling items are interrelated or interdependent and have an offsetting effect on each other. Those respondents asked that the Board clarify whether entities may apply judgment in presenting reconciling items on a gross or net basis. The Board concluded that requiring gross treatment of the tax effects will result in greater comparability and increased transparency of information for investors, thereby enhancing the benefits of the improvements to the rate reconciliation disclosure. Furthermore, investors broadly supported gross presentation except in specific circumstances. Therefore, the Board decided to clarify that all reconciling items should be presented on a gross basis unless specific guidance permits net presentation, as discussed below.

BC33. Stakeholders suggested that the reconciling items in the effect of cross-border tax laws category, particularly GILTI, be presented net of the related foreign tax credits. They noted that disclosing the cross-border income taxes imposed by the jurisdiction (country) of domicile gross, rather than net of the benefits provided by the same jurisdiction for foreign taxes paid (or deemed paid) on the same income, would not reflect the true incremental tax cost of income earned abroad. In response to stakeholder feedback, the Board decided to allow the net presentation of the tax effects of cross-border tax laws and the related foreign tax credits in certain circumstances. The Board considered whether the amendments in this Update should specifically identify which cross-border tax laws and related foreign tax credits may be presented net (for example, specifically referencing GILTI and its related foreign tax credits). However, instead, the Board decided to provide a principles-based criterion that could be applied to other tax effects in the effect of cross-border tax laws category and could accommodate future changes in the tax environment. Effectively, if there is a credit in the same jurisdiction, which is an inherent part of the calculation of a cross-border tax law, the credit could be netted with the cross-border tax law effect.

BC34. Stakeholders also requested that the Board clarify how to present the initial amount of unrecognized tax benefits recognized related to a tax position taken or expected to be taken in the reporting period in the rate reconciliation. Considering the nature of the unrecognized tax benefits, the Board decided to allow net presentation of the unrecognized tax benefit with its related tax position taken or expected to be taken in the same reporting period and include the net amount in the category where the tax position is presented.

BC35. The Board decided to require further disaggregation of reconciling items based on a quantitative threshold of 5 percent (that is, whether the absolute value of the effect of a reconciling item is equal to or greater than the absolute value of 5 percent of the amount computed by multiplying the income [or loss] from continuing operations before income tax by the applicable statutory federal or national income tax rate). The 5 percent threshold is consistent with the existing SEC Regulation S-X 210.4-08(h)(2) applied by public business entities. The Board notes that the 5 percent threshold offers an appropriate balance between providing investors with decision-useful information and the incremental costs of reporting the information. The Board also notes that stakeholders, including most comment letter respondents and investors, were generally comfortable with that threshold. As a result, the Board decided not to consider other suggested thresholds, such as a quantitative threshold higher than 5 percent, a qualitative threshold, or a threshold independent of the applicable statutory tax rate.

BC36. The Board also decided to align the disclosure requirement in paragraph 740-10-50-12 on the income tax rate used in the rate reconciliation with the guidance in SEC Regulation S-X 210.4-08(h)(2). For a foreign entity, the federal (national) income tax rate in its jurisdiction (country) of domicile should normally be used in the rate reconciliation. However, if the rate used by an entity is other than the U.S. federal corporate income tax rate, the entity is required to disclose the rate used and the basis for using such a rate.

BC37. For the foreign tax effects category, the Board agreed that breaking down this category into significant reconciling items by jurisdiction (country) and by nature provides necessary additional transparency. If a foreign jurisdiction meets the 5 percent threshold, it should be separately disclosed as a reconciling item. Within any foreign jurisdiction (regardless of whether it meets the 5 percent threshold), the reconciling item should be separately disclosed by nature if its gross amount (positive or negative) meets the 5 percent threshold. For example, if the statutory tax rate difference between a foreign jurisdiction (country) and the jurisdiction (country) of domicile meets the 5 percent threshold, it should be separately disclosed as a reconciling item within the foreign jurisdiction under the foreign tax effects category in the rate reconciliation. In some cases, a foreign jurisdiction in total may not meet the 5 percent threshold, but there could be individual reconciling items that meet the 5 percent threshold, disclosed for that foreign jurisdiction. As illustrated in paragraph 740-10-55-231, there could be different reconciling items by nature presented for different foreign jurisdictions or there could be no reconciling items by nature presented for certain foreign jurisdictions depending on the application of the 5 percent threshold. Investors supported the disaggregation of this category by jurisdiction (country) and by nature on a gross basis and indicated that this is one of the most significant improvements made by the amendments in this Update. Therefore, the Board decided not to further consider other stakeholder suggestions to limit the disaggregation of reconciling items in this category only to jurisdictions that meet the 5 percent threshold or allow reconciling items of similar natures within this category to be disclosed on an aggregated basis.

BC38. The Board considered but decided not to provide additional guidance in Topic 740 on how to apply the 5 percent threshold when an entity operates at or around break even or an entity is domiciled in a jurisdiction with no or minimal statutory income tax rates beyond the alignment of the disclosure requirement with the SEC guidance discussed in paragraph BC36. Considering the outreach feedback from stakeholders and the mixed views from comment letter respondents, the Board did not identify a pervasive need for specific guidance on how to apply the amendments in this Update to the rate reconciliation disclosures under those circumstances. The Board acknowledged that if an entity (a) is domiciled in a jurisdiction with an income tax rate significantly lower than the U.S. statutory income tax rate or (b) operates at or around break even, the entity would be expected to apply judgment in determining the appropriateness of using a different statutory income tax rate and evaluating the materiality of reconciling items.

BC39. Considering the nature of the state and local income tax category, the Board decided not to require further disaggregation, under paragraph 740-10-50-12A(b), of that category. Instead, the Board decided to require that public business entities provide qualitative information of the states and local jurisdictions that make up the majority of the effect of the state and local income tax category in the rate reconciliation. A majority of stakeholders agreed with this disclosure and noted that it is reasonable and practical and will provide meaningful information to investors without requiring a significant cost to implement. However, other stakeholders were concerned that an entity may be required to disclose information about a large number of states and local jurisdictions and that it would require a significant amount of effort to compile this information. In addition, certain stakeholders asked the Board to clarify or define “majority of the effect.”

BC40. The Board noted that the information needed for this disclosure is generally expected to be included in the calculation of a composite state tax rate used in computing the state tax provision. To improve clarity, the Board confirmed that “majority of the effect” means a simple majority (greater than 50 percent) of the effect of the state and local income tax category. The Board further clarified that when identifying the states and local jurisdictions that make up the majority of the effect, an entity should begin with the state or local jurisdiction that has the largest effect and in descending order add states or local jurisdictions with the next largest effect until the aggregated effect is greater than 50 percent. This aggregation may be based on the composite state tax rate information used to compute the state tax provision. The Board considered but decided not to apply another threshold, such as individual significance, to identify the states and local jurisdictions that must be included in this disclosure. In general, the Board does not expect that most entities will be required to disclose a significant number of states and local jurisdictions or will incur significant efforts and costs to provide the required disclosure.

BC41. Stakeholders generally agreed with the Board’s decision to require that public business entities provide an explanation, if not otherwise evident, of individual reconciling items, such as the nature and effect of the reconciling items. Investors stated that this disclosure will provide them with (a) greater contextual information to better understand an entity’s tabular rate reconciliation and (b) a more complete view of an entity’s tax risks, opportunities, and management. However, some stakeholders stated that the required explanatory information, especially the explanation of “significant year-over-year changes” already is included in management’s discussion and analysis (MD&A) or is more appropriately included there. The Board agreed with the feedback that it is more appropriate to disclose the significant year-over-year changes explanation in MD&A and decided to remove it from paragraph 740-10-50-12C. In addition, to further illustrate the explanatory information to be provided under this guidance, the Board added other examples, such as the underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. The Board noted that an entity can use the disclosure required by paragraph 740-10-50-12C to provide additional relevant information to help explain its rate reconciliation.

BC42. Stakeholders generally supported the Board’s decision to require that public business entities disclose the tabular rate reconciliation on an annual basis.

BC43. Many stakeholders questioned the necessity and appropriateness of the proposed qualitative disclosure of any reconciling items that result in significant changes in the estimated annual effective tax rate from the effective tax rate of the prior annual reporting period on an interim basis. They noted that this proposed disclosure (a) may provide information similar to what is required to be provided in MD&A or in the existing guidance in paragraph 740-270-50-1 and (b) may not provide decision-useful information because of the lack of comparability of the estimated annual effective tax rate, which excludes discrete items, with the prior year’s actual effective tax rate. Under paragraph 740-270-50-1, the reasons for significant variations in the customary relationship between income tax expense and pretax accounting income are required to be disclosed in interim periods if they are not otherwise apparent from the financial statements, from the footnotes, or from the nature of the entity’s business. After considering stakeholder feedback, the Board concluded that this existing interim disclosure requirement is sufficient to capture the information related to significant changes in an entity’s effective tax rate during an interim period (for example, the reasons for significant revision to the estimated annual effective tax rate). On the basis of these considerations, the Board decided not to add a separate interim disclosure requirement for the rate reconciliation.

BC44. The tabular rate reconciliation disclosure applies to all public business entities. A few comment letter respondents asked that certain public business entities, such as broker dealers or entities that meet the definition of a public business entity but do not file financial information with the SEC, be exempt from the required rate reconciliation disclosure. The Board considered the feedback and noted that is a broader issue related to the definition of a public business entity and decided not to change the scope of entities required to disclose the rate reconciliation table.

BC45. Under existing guidance, nonpublic entities are required to disclose the nature of significant reconciling items but may omit a numerical reconciliation. The Board proposed in the amendments that a numerical reconciliation not be required. However, the Board also proposed to improve the qualitative disclosure guidance by requiring entities other than public business entities to disclose the nature and effect of specific categories of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.

BC46. In arriving at its decision, the Board primarily considered the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, and feedback from Private Company Council (PCC) members. In addition, in previous research performed in connection with the 2019 revised proposed Update, stakeholders indicated that not-for-profit entities and employee benefit plans generally do not engage in activities that result in a significant amount of unrelated business income taxes or do not have significant income tax activities. For not-for-profit entities and employee benefit plans that are subject to Topic 740, similar considerations for private companies would be extended to those entities.

BC47. The Private Company Decision-Making Framework indicates that in deciding whether to provide disclosure alternatives for private companies, the Board and the PCC should place the most weight on the relevance of the disclosure to the most common types of users of private company financial statements (investors, lenders, and other creditors). At the September 2022 PCC meeting, PCC members who are users had mixed views on whether private companies should be required to provide the same rate reconciliation disclosures that would be required for public business entities. One user PCC member indicated that he would not benefit from a numerical reconciliation, and another user PCC member expressed concern that preparing a numerical rate reconciliation would be costly for smaller private entities. Conversely, one academic PCC member expressed support for a disaggregated numerical rate reconciliation.

BC48. Paragraph 2.6 of the Private Company Decision-Making Framework states in part that in evaluating potential disclosure alternatives for private companies, the Board and the PCC also should consider, but place less weight on, the cost of providing the disclosures, both in terms of the cost incurred by the preparer and the efforts spent by the user to sort through disclosures that may have limited or no relevance. At the September 2022 PCC meeting, preparer PCC members indicated that a numerical rate reconciliation with specific categories and a quantitative threshold would significantly increase reporting costs compared with the cost of complying with the narrative disclosures currently required. They suggested focusing on the specific categories rather than jurisdictional disaggregation. Another practitioner PCC member noted that the current requirement to disclose the nature of significant reconciling items provides the information necessary to enable users to ask management follow-up questions (referred to as the “red flag approach” in the Private Company Decision-Making Framework).

BC49. Paragraph 2.7 of the Private Company Decision-Making Framework states that because many users of private company financial statements do not seek the same level of detailed information as do users of public company financial statements and because of cost considerations, the Board and the PCC should consider not requiring the disclosure of disaggregated information such as (a) a tabular reconciliation and (b) quantitative details about the composition of certain income statement or balance sheet line items. Instead, disclosure alternatives should be provided that limit the requirement to a nontabular description or, in other words, a narrative (which may include both quantitative information and qualitative information) that can provide users with a basic understanding of items having the most significant effect on financial statements.

BC50. The Board considered feedback on whether qualitative information about the nature of significant reconciling items would be useful. At the June 2023 PCC meeting, user PCC members expressed support for the qualitative rate reconciliation disclosures, noting that the disclosures would be helpful in understanding nonrecurring items affecting the current-year tax rates, identifying special tax arrangements and internal tax-planning strategies that had an effect on the effective tax rate, and identifying other areas to further discuss with management. User PCC members also noted that income taxes are a difficult area to understand and that it is difficult to evaluate sustainability of the effective tax rate. They indicated that the disclosures would provide decision-useful information for analyzing financial statements.

BC51. Feedback from comment letter respondents was mixed on the utility of the proposed changes to the qualitative rate reconciliation disclosures. Additionally, other comment letter respondents indicated that the proposed disclosures did not go far enough and that large private companies should provide the same information as public companies (that is, a quantitative rate reconciliation table should be required).

BC52. The Board also considered feedback on the cost of providing qualitative information about the nature of reconciling items. At the June 2023 PCC meeting, a preparer PCC member stated that the data necessary to produce the enhanced qualitative rate reconciliation disclosures already exist, the enhanced disclosures would not be costly, and adding information to the existing qualitative disclosures would not be burdensome. Conversely, a practitioner PCC member highlighted that while the information to be included in the qualitative rate reconciliation disclosure is typically available, additional time would be spent analyzing that information and drafting the narrative language to comply with the qualitative disclosures. Similar to the feedback received from the PCC, feedback from comment letter respondents was mixed on whether the changes to the qualitative rate reconciliation disclosures for entities other than public business entities would result in additional costs and time to implement.

BC53. The Board acknowledged feedback from a small number of comment letter respondents that indicated that for entities other than public business entities with complex tax structures and those that operate in multiple jurisdictions, a qualitative disclosure could be less clear and concise as compared with a quantitative disclosure. The Board noted that entities other than public business entities may provide a tabular, quantitative rate reconciliation if they determine that it provides better information for private company users.

BC54. On the basis of private company stakeholder feedback and an analysis of the Private Company Decision-Making Framework, the Board decided to affirm (a) that entities other than public business entities are required to qualitatively disclose the nature and effect of specific categories of reconciling items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate and (b) that a numerical reconciliation is not required.

BC55. Under existing guidance, entities are required to disclose the total amount of income taxes paid during the period in accordance with paragraph 230-10-50-2. The Board received investor feedback that disaggregated information about income taxes paid to jurisdictions would assist them in better understanding an entity’s income tax risks and opportunities and the sustainability of the entity’s effective tax rate. Investors indicated that this information would help them assess trends and highlight areas that require additional discussion with management.

BC56. On the basis of that feedback, in the 2019 revised proposed Update, the Board proposed requiring that all entities disclose income taxes paid disaggregated by federal (national), state, and foreign categories. Some comment letter respondents to the 2019 revised proposed Update supported the proposed disaggregation of income taxes paid, noting that it would enable investors to look at the trends over several years to obtain decision-useful information. Other respondents did not support disclosing income taxes paid information at that granular level because it would be costly for preparers and because that disclosure would not produce information that is useful, predictive, or consistent for investors.

BC57. On the basis of continued investor requests that the Board require further disaggregation of income taxes paid by jurisdiction, the Board decided to retain the proposal to disaggregate income taxes paid by federal (national), state, and foreign categories in the 2023 proposed Update. Investors indicated that this level of disaggregation (a) would enhance their understanding of entities’ income taxes and their ability to project the amount, timing, and uncertainty of future cash flows and (b) would assist when analyzing the correlation between income tax expense (benefit) and income taxes paid. In addition, when an entity’s effective tax rate approximates the statutory tax rate, investors indicated that providing additional information about income taxes paid would provide additional insight that otherwise would not be highlighted by the rate reconciliation. Comment letter respondents also indicated that income taxes paid information disaggregated at this level is reasonably available and would be relatively easy to accumulate and disclose.

BC58. On the basis of stakeholder feedback, the Board decided to retain in this Update the requirement from the proposed Update that all entities disclose income taxes paid disaggregated by federal (national), state, and foreign categories.

BC59. In addition, in the 2023 proposed Update, the Board decided to require that all entities disclose income taxes paid further disaggregated by individual jurisdiction on the basis of a quantitative threshold of 5 percent of total income taxes paid. In arriving at its decision, the Board placed emphasis on preparer and investor feedback indicating that most companies pay the majority of their taxes to only a small number of jurisdictions and that substantial coverage would be achieved using the 5 percent threshold. The Board also considered that the 5 percent threshold would be consistent with the existing requirement in SEC Regulation S-X 210.4-08(h)(1) to separately disclose individual components of pretax income or loss and income tax expense or benefit that exceed 5 percent of total tax expense.

BC60. During initial deliberations, the Board considered but decided not to require disaggregation of income taxes paid based on a specified number of jurisdictions in which the highest amount of taxes was paid because the specified number of jurisdictions would be arbitrary, may change from period to period, and would likely result in some entities evaluating immaterial amounts for disclosure and other entities disclosing jurisdictions with cumulatively low coverage. The Board also considered but decided not to require disaggregation of individual jurisdictions based on major jurisdictions with a quantitative coverage requirement. The Board decided that establishing a common understanding and application of what constitutes a major jurisdiction would be challenging and might result in diversity in practice and less decision-useful information.

BC61. Stakeholders had mixed views on whether and how to require disclosure of income taxes paid disaggregated by individual jurisdictions. Investors expressed support for the proposed requirement to disaggregate income taxes paid on the basis of a quantitative threshold of 5 percent of total income taxes paid, and a majority of comment letter respondents generally supported this threshold. Most comment letter respondents that did not support the amendments in the proposed Update expressed concern that the 5 percent threshold is too prescriptive, could result in the disclosure of information that is too detailed, and should be replaced with an entity-specific significance assessment. Some comment letter respondents expressed concern that jurisdictional disaggregation does not provide decision-useful information to investors.

BC62. Comment letter respondents provided suggestions for alternative approaches. The Board considered but decided not to require disaggregation of income taxes paid based on a higher threshold (for example, 10 percent) primarily due to investor and practitioner feedback supporting the proposed threshold of 5 percent. The Board observed that the 5 percent threshold would provide investors with an appropriate level of additional information to assist with trend analysis, to understand tax risks and opportunities, and to understand timing of cash flows. The Board also noted that increasing the threshold could reduce the amount of decision-useful information received by investors without providing significant cost savings for preparers.

BC63. The Board also considered but decided not to require disaggregation based on individually significant jurisdictions. The Board decided that in this case establishing a bright-line threshold was preferable to a more subjective assessment. For example, establishing a common understanding and application of what constitutes a significant jurisdiction has the potential to increase costs and may provide less decision-useful information to investors and result in diversity in practice.

BC64. On the basis of stakeholder feedback, the Board decided to retain the requirement from the proposed Update that an entity disclose income taxes paid further disaggregated by individual jurisdiction on the basis of a quantitative threshold of 5 percent of total income taxes paid. Therefore, if the income taxes paid to an individual jurisdiction is equal to or greater than the 5 percent threshold, an entity must separately disclose income taxes paid in that jurisdiction. An entity may identify a country, state, or local territory as an individual jurisdiction.

BC65. The Board observed that the guidance in paragraph 105-10-05-6, which states that the provisions of the Codification need not be applied to immaterial items, is applicable to the amendments in this Update, as it is to all Codification guidance.

BC66. Some stakeholders asked that the Board clarify the materiality considerations for the jurisdictional disclosures. They noted that the amendments in the proposed Update are unclear on whether an entity would be required to separately disclose income taxes paid to a jurisdiction that meets the 5 percent threshold regardless of whether the amount of income taxes paid is material. Some stakeholders asked that the Board consider replacing the quantitative threshold with an entity-specific materiality assessment or provide additional implementation guidance, for instance, on acceptable departures from the 5 percent threshold.

BC67. The Board considered the feedback and decided that entities are required to disclose income taxes paid further disaggregated by individual jurisdiction on the basis of a quantitative threshold of 5 percent. However, the Board observed that the materiality guidance in paragraph 105-10-05-6 is applicable to the amendments in this Update, as it is to all Codification guidance. Therefore, the amendments on the disclosure of income taxes paid do not apply to immaterial items. That is, an entity does not need to separately disclose income taxes paid for any jurisdiction (whether that is federal, state, or foreign groupings or individual jurisdictions based on a quantitative threshold of 5 percent) if the amount is immaterial.

BC68. The Board also clarified in the proposed Update that the amount of income taxes paid required to be disclosed is the net amount paid or net refund received in the period, computed as total income taxes paid net of cash refunds received. The Board considered certain stakeholder feedback that disclosing income taxes paid on a net basis is more relevant and decision useful than disclosing income taxes paid on a gross basis. The Board noted that entities generally disclose income taxes paid in total on a net basis. Additionally, the Board noted that certain investor feedback indicated that providing a net amount would enable investors to identify trends more efficiently than providing gross amounts. The Board also noted that timing differences related to certain payments and refunds vary; therefore, the net amounts provide a more representative picture of actual cash flows related to taxes in each period.

BC69. Many comment letter respondents supported disclosure of the amount of the net payment remitted or net refund received for the period, noting that this would be consistent with current practice for disclosing income taxes paid in total as required by paragraph 230-10-50-2. Stakeholders that supported net presentation also noted that a net basis more accurately represents the economic position of an entity and its cash flows in each period for each jurisdiction. Some investors stated that they prefer gross presentation of income taxes paid rather than net presentation. Comment letter respondents, including investors, that did not support disclosure on a net basis noted that certain refunds may relate to prior periods, which may make it difficult to interpret those amounts, thereby reducing decision usefulness. The feedback received from stakeholders during the exposure period was consistent with feedback considered by the Board during initial deliberations. The Board also considered but decided not to require additional qualitative disclosure of significant refunds received because of potential implementation issues associated with the qualitative disclosure, such as defining what is included in “refunds received” and what constitutes “significant.” The Board also noted that the intent was to further disaggregate the total amount of income taxes paid, which is typically disclosed on a net basis.

BC70. On the basis of stakeholder feedback, the Board decided to require that income taxes paid be disclosed on a net basis. Furthermore, the Board clarified that an entity should apply the 5 percent quantitative threshold by comparing the absolute value of the net payment or net refund in each jurisdiction with the absolute value of total income taxes paid (net of refunds received) when determining the jurisdictions for separate disclosure in accordance with paragraph 740-10-50-23.

BC71. The Board proposed that all entities disclose (a) the year-to-date amount of income taxes paid disaggregated by federal (national), state, and foreign categories on both an interim basis and an annual basis and (b) the amount of income taxes paid disaggregated by individual jurisdiction (based on the 5 percent quantitative threshold) on an annual basis. The Board noted that disaggregation of income taxes paid by federal (national), state, and foreign categories is relevant to investor analyses and that disclosing it on an interim basis, along with a qualitative disclosure of the rate reconciliation information on an interim basis for public business entities, would provide investors with relevant information in a timely manner. The Board noted that disaggregation of income taxes paid by individual jurisdiction on an interim basis would not provide decision-useful information because taxes are generally computed on an annual basis; therefore, interim payments in an individual jurisdiction may not be ratable or representative of annual information.

BC72. Comment letter respondents had mixed views on the frequency of reporting for each of the disaggregated income taxes paid disclosures. More than half of respondents, including investors, did not support the proposal to require interim disclosure of income taxes paid disaggregated by federal (national), state, and foreign categories. Many respondents commented that income taxes paid on a quarterly basis would not be comparable because of the significant variation in timing of income tax payments due to factors such as estimated and extension payments, refunds, and settlements. Many respondents also noted that refunds and settlements often relate to prior periods and, therefore, they were concerned that providing this information on a quarterly basis may not be decision useful to investors. Some respondents also noted that disaggregation of income tax payments requires significant additional processes and changes to internal controls and accounting systems and may be difficult to achieve because of condensed time frames for quarterly reporting. Many respondents noted that providing income taxes paid disaggregated by federal (national), state, and foreign categories, as well as by individual jurisdiction, on an annual basis would be more operational and decision useful. During investor outreach, many investors indicated that annual disclosures would be sufficient. Some investors indicated that although they would prefer to receive this information on an interim basis, they would support annual disclosure if the information could be provided in a more timely manner.

BC73. On the basis of stakeholder feedback, the Board decided to require that entities disclose only on an annual basis the amount of income taxes paid disaggregated by (a) federal (national), state, and foreign categories and (b) individual jurisdictions on the basis of a quantitative threshold of 5 percent of total income taxes paid. The Board noted that an annual disclosure frequency provides investors with sufficient information to perform trend analysis.

BC74. The Board also considered but decided not to require disclosure of comparative information by jurisdiction for all years presented. The Board noted that requiring comparative information for income taxes paid could result in operability challenges and may be contrary to the guidance on materiality in Topic 105 (such as when a jurisdiction meets the quantitative threshold and is material in the current period but was not presented in previous periods because the amount of income taxes paid was not material).

BC75. The Board proposed to require that entities other than public business entities provide the same income taxes paid disclosures as public business entities. In arriving at its decision, the Board primarily considered the Private Company Decision-Making Framework and feedback from PCC members.

BC76. When disaggregated disclosures are being considered for private companies, the Private Company Decision-Making Framework indicates that the Board and the PCC should place the most weight on the relevance of the disclosure to the most common types of users of private company financial statements (investors, lenders, and other creditors). At the September 2022 PCC meeting, some user PCC members expressed support for disclosing income taxes paid on a disaggregated basis, indicating that disaggregated information about income taxes paid would help them better understand an entity’s income tax risks and opportunities and the sustainability of tax rates. That information also would help assess trends and highlight areas that require more management input. Conversely, some user PCC members indicated that they could request tax returns from management and that if the request is granted, the tax returns would provide sufficient information to perform an analysis and provide a basis to ask for further management input.

BC77. Paragraph 2.6 of the Private Company Decision-Making Framework states in part that in evaluating potential disclosure alternatives for private companies, the Board and the PCC also should consider, but place less weight on, the cost of providing the disclosures, both in terms of the cost incurred by the preparer and the efforts spent by the user to sort through disclosures that may have limited or no relevance. At the September 2022 PCC meeting, some preparer PCC members stated that jurisdictional information about income taxes paid is available or could be made available.

BC78. Paragraph DF7 of the Private Company Decision-Making Framework states in part that lenders and other creditors are concerned most about financial statement amounts and notes that affect reported amounts of cash, liquidity, and cash flow from operations to service debt and that many private company investors focus on accounting and disclosure requirements affecting cash. Disclosures on income taxes paid align with that notion.

BC79. The Board considered feedback on the usefulness of disaggregated information about income taxes paid. At the June 2023 PCC meeting, some user PCC members expressed support for disclosing income taxes paid on a disaggregated basis, noting that they have limited access to management and that the information would help them assess trends and better understand an entity’s income tax risks and opportunities and the sustainability of tax rates. Other user PCC members noted that they commonly have access to management and, therefore, may not need jurisdictional income taxes paid information disclosed. Feedback from comment letter respondents was mixed. One comment letter respondent indicated that the disaggregated income taxes paid disclosures would provide decision-useful information, while several respondents indicated that those disclosures would not provide decision-useful information.

BC80. The Board also considered feedback on the costs of disaggregated information about income taxes paid. At the June 2023 PCC meeting, several preparer and practitioner PCC members stated that jurisdictional information about income taxes paid is available or could be made available with limited costs. Several PCC members and several comment letter respondents expressed concerns about the 5 percent threshold, asserting that (a) it is too low, (b) it could potentially be burdensome for preparers, (c) it could result in the disclosure of immaterial information, and (d) access to management negates the need for this level of jurisdictional information. Some of those same concerns about the threshold were expressed in regard to public business entities.

BC81. The Board considered but decided not to require disaggregation of income taxes paid based on a higher threshold (for example, 10 percent) for entities other than public business entities. The Board observed that the disaggregated information is relevant for users of private company financial statements and that the information can be provided at a reasonable cost. Therefore, there was no compelling reason to provide a disaggregation threshold for entities other than public business entities that differed from that for public business entities. Additionally, the Board observed that the guidance on materiality in paragraph 105-10-05-6 is applicable. Therefore, the amendments in this Update on disclosures of income taxes paid based on the application of a quantitative threshold do not apply to immaterial items.

BC82. On the basis of private company stakeholder feedback and an analysis of the Private Company Decision-Making Framework, the Board affirmed the requirement for entities other than public business entities to provide the same income taxes paid disclosures as public business entities.

BC83. This Update includes the following amendments that were previously exposed for comment in the 2019 revised proposed Update:

The Term Public Business Entity

BC84. Currently, some disclosure requirements in Topic 740 are required by public entities and some are required by nonpublic entities. In December 2013, the Board issued Accounting Standards Update No. 2013-12, Definition of a Public Business Entity—An Addition to the Master Glossary. The primary purpose of the amendments in that Update was to amend the Master Glossary definition to include one definition of the term public business entity for future use in GAAP.

BC85. Research previously performed indicated that certain community banks that may not have been considered public entities previously could be considered public business entities. Feedback from community banks indicated that the additional disclosures in Topic 740 currently required for public entities would not be costly because some of them already provide those disclosures and the population of community banks that would fall into the definition of a public business entity would not be significant.

BC86. Most comment letter respondents to the 2023 proposed Update and the 2019 revised proposed Update broadly supported replacing the term public entity with public business entity, noting that the change in scope would improve consistency in the Codification and would not create a significant change in practice.

BC87. On the basis of previous research performed and comment letter feedback, the Board decided to replace the term public entity in Topic 740 with the term public business entity as defined in the Master Glossary.

BC88. Paragraph 740-10-50-15 requires disclosure of unrecognized tax benefits that could change in the next 12 months. Disclosure of estimates of amounts and timing related to future events is consistent with Chapter 8 of Concepts Statement 8 only if the estimate of the amount and timing is an input that explains a measurement in the financial statements or in the notes to financial statements. The disclosure in paragraph 740-10-50-15(d) is inconsistent with Chapter 8. Furthermore, that disclosure has limitations because an entity generally may know that an open tax issue is being resolved a couple of weeks to several months in advance of the settlement but may be unable to reasonably assess the likelihood of other settlements beyond that point. Therefore, the disclosure of estimates of changes in the next 12 months generally provides only estimated changes expected in the next 3 months. Accordingly, the Board decided to remove that existing disclosure.

BC89. Comment letter respondents to the 2023 proposed Update and the 2019 revised proposed Update supported the proposed amendment to remove the requirement to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits in the next 12 months because it would be difficult to reliably predict changes and, therefore, may not provide meaningful information to investors.

BC90. One comment letter respondent indicated that while it supports the removal of the changes in unrecognized tax benefits disclosure, similar disclosures may continue to be required in accordance with the disclosure requirements included in Topic 275, Risks and Uncertainties. Paragraph 275-10-50-8 requires disclosure about an estimate that should be made when known information available before the financial statements are issued or are available to be issued indicates that both of the following criteria are met:

BC91. On the basis of comment letter feedback, the Board decided to remove the disclosure in paragraph 740-10-50-15(d) about the changes in unrecognized tax benefits. In addition, the Board acknowledged that stakeholders should continue to consider whether disclosures should be provided in accordance with Topic 275, consistent with the broad scope of that guidance.

BC92. Paragraph 740-30-50-2 currently requires the following disclosures when a deferred tax liability is not recognized for undistributed foreign earnings:

BC93. Before the enactment of the Tax Cuts and Jobs Act, investors had indicated that information about the tax consequences of remittance of undistributed foreign earnings was a primary area of focus. The Tax Cuts and Jobs Act generally allows entities to repatriate earnings from their foreign subsidiaries without incurring U.S. federal income taxes. After the enactment of the Tax Cuts and Jobs Act, an entity may, for example, still make an indefinite reinvestment assertion for its foreign earnings for state tax purposes. However, stakeholders indicated that the tax consequences of an indefinite reinvestment assertion are significantly less than those before the Tax Cuts and Jobs Act was enacted.

BC94. Stakeholders indicated that the changes as a result of the Tax Cuts and Jobs Act reduce the relevance of the existing disclosure of the cumulative temporary differences related to foreign subsidiaries when a deferred tax liability is not recognized (paragraph 740-30-50-2(b)). That is because a change in assertion about the indefinite reinvestment of foreign earnings would not result in the recognition of a material deferred tax liability in many cases. Stakeholders also indicated that the disclosure of a large temporary difference could be misleading when the tax effects, when incurred, likely are small because users could infer that the tax consequences of a large temporary difference also would be significant, which likely would not be the case. Additionally, stakeholders indicated that the disclosure is costly to prepare.

BC95. The Board acknowledged that an entity may still assert indefinite reinvestment of foreign earnings so that it is not required to record a liability for the tax consequences of those earnings. However, the Board agreed with stakeholders that the tax consequences of that assertion will not be significant in many cases. The Board decided that the limited benefit of the disclosure requirement in paragraph 740-30-50-2(b) does not justify the expected costs and therefore removed the existing disclosure from that paragraph.

BC96. All comment letter respondents to the 2023 proposed Update and the 2019 revised proposed Update supported removing 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 comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures. Those respondents noted that the disclosure is costly to prepare and significantly less relevant after considering the effects of the Tax Cuts and Jobs Act, which generally allows entities to repatriate earnings from foreign subsidiaries without incurring U.S. federal income taxes.

BC97. Some comment letter respondents requested that the Board also remove the disclosures in paragraph 740-30-50-2(c) through (d). The Board considered but decided not to address that request, noting that it is broader than the established scope of the income tax disclosures project and may delay the benefits to investors from the issuance of the amendments in this Update.

BC98. The Board decided to include in the amendments in this Update the requirement to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign in response to a request from the SEC as part of the SEC’s Disclosure Update and Simplification initiative. The SEC currently requires similar disclosures. Board members indicated that the SEC-required disclosures provide decision-useful information to investors and would enable investors to more fully analyze an entity’s income tax risks and opportunities. The Board decided to require those disclosures for all entities.

BC99. Most respondents to the 2019 revised proposed Update supported the proposed amendment that would require the disaggregation of income (or loss) from continuing operations before income tax expense between domestic and foreign, indicating that it would provide decision-useful information to investors. One respondent noted that the disclosure would not bring any additional value for non-U.S.-domiciled multinational entities.

BC100. Most respondents to the 2019 revised proposed Update supported the proposed amendment that would require the disaggregation of income tax expense (or benefit) from continuing operations by federal (national), state, and foreign, noting that it would be operable and result in decision-useful information for investors. Two respondents did not support the disaggregation of income tax expense (or benefit) from continuing operations by federal (national), state, and foreign, indicating that decision-useful information would not be provided by requiring entities to disaggregate income tax expense (or benefit) from continuing operations at such a granular level.

BC101. Respondents to the 2023 proposed Update that commented on those disclosures generally expressed their support, noting that the disclosures would provide decision-useful information to investors.

BC102. Several respondents to the 2019 revised proposed Update that generally supported the disaggregation of income tax expense (or benefit) from continuing operations by federal (national), state, and foreign also suggested that the Board consider further aligning the disclosure to SEC Regulation S-X by adding the “5 percent rule,” which excludes foreign or other income taxes that are less than 5 percent of the total tax expense from separate disclosure. The Board considered but decided not to add the “5 percent rule” because (a) materiality guidance in paragraph 105-10-05-6 indicates that the provisions of the Codification need not be applied to immaterial items and (b) whether an entity is applying the materiality guidance in the Codification or the 5 percent threshold in existing SEC guidance, a similar outcome may be reached.

BC103. One respondent to the 2023 proposed Update (and several respondents to the 2016 proposed Update) suggested that the Board clarify whether the disclosure to disaggregate income (or loss) from continuing operations before income tax expense should be presented before or after intercompany eliminations. The 2019 revised proposed Update specified that such information should be provided before intra-entity eliminations. However, comment letter feedback on the 2019 revised proposed Update strongly indicated that disclosing disaggregated pretax income (or loss) before intra-entity eliminations would require costly systems modifications. Additionally, respondents to the 2019 revised proposed Update indicated that the expected benefits (that is, the resulting correlation between pretax income and the related income tax expense by foreign and domestic components) may not be as significant as previously thought. Respondents explained that the correlation is less useful following the enactment of the Tax Cuts and Jobs Act and, specifically, the provisions under the GILTI regime requiring that entities be subject to U.S. income taxes on earnings that would be reported as non-U.S. pretax income. Additionally, the Board received feedback that the correlation between foreign and domestic pretax income (or loss) and the related income tax expense (or benefit) also could be affected by certain intercompany activities such as dividends and intercompany sales of foreign subsidiaries. On the basis of stakeholder feedback and the likely cost-benefit of providing the disclosure before intra-entity eliminations, the Board did not specify whether the disclosure of pretax income (or loss) from continuing operations should be presented before or after intercompany eliminations.

BC104. Several respondents to the 2019 revised proposed Update and the 2023 proposed Update suggested that the Board clarify how disaggregation by state in the disclosure of income tax expense (or benefit) from continuing operations by federal (national), state, and foreign would apply to non-U.S. jurisdictions, noting that many countries do not have an equivalent jurisdictional level. The Board clarified that an entity that is not domiciled in the United States should apply this requirement by disclosing the state income tax expense (or benefit) by state, local, or similar territories within the country of domicile.

BC105. On the basis of stakeholder feedback, the Board decided to require that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign.

BC106. The Board decided to require that entities other than public business entities disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. In deciding this, the Board considered the Private Company Decision-Making Framework, comment letter feedback pertaining to private companies, and feedback from PCC members.

BC107. Respondents to the 2023 proposed Update that commented on those disclosures had mixed views on whether the information would be decision useful for private company investors. Additionally, one respondent indicated that the disclosures are clear and operable for private companies because the calculations for income (or loss) from continuing operations before income tax expense and income tax expense (or benefit) are already being done in connection with the preparation of annual financial statements.

BC108. Two respondents to the 2019 revised proposed Update did not support the disaggregation of income (or loss) from continuing operations before income tax expense for private companies primarily because it would not offer decision-useful information to private company investors and it does not appear to align with areas that private company investors focus on, such as income taxes paid and compliance with taxing authorities.

BC109. Two respondents to the 2019 revised proposed Update did not support the disaggregation of income tax expense (or benefit) from continuing operations for private companies because some private companies lack the resources to provide the disclosure in a timely manner. Additionally, those respondents commented that tax provisions reflected in financial statements are primarily estimates and to disclose income tax expense (benefit) by state that is more precise than an estimate, an entity would need to gather its state apportionment data and prepare its tax returns much earlier than the entity presently does.

BC110. At the June 2023 PCC meeting and in outreach meetings, user PCC members indicated that the disaggregated disclosure of income (or loss) from continuing operations before income tax expense would provide a better perspective on where cash flows are coming from and would allow a user to understand the degree of foreign income to domestic income, which would not otherwise be available unless requested from (and obtained from) management. A user PCC member noted that not all users have the same level of access to management; therefore, this information is important to disclose. User PCC members also stated that the disaggregation of income tax expense (or benefit) would provide insight into the breakdown of income tax expense and whether there are unusual fluctuations in federal, state, and foreign that may require further clarification for proper analysis. Another user PCC member indicated that the disaggregation of income (or loss) from continuing operations before income tax expense, income tax expense (or benefit) from continuing operations, and income taxes paid would help in analyzing the correlation between those amounts.

BC111. During 2023 PCC meetings, a preparer PCC member indicated that the information that would be required to be disclosed is not difficult to obtain because it is part of the tax provision, whereas a practitioner PCC member expressed concern that some small and medium-sized private companies may not have the systems in place to appropriately determine the disaggregation of income (or loss) from continuing operations before income tax expense by domestic and foreign. Another practitioner PCC member expressed concern that the disaggregated disclosure of income tax expense (or benefit) could be misinterpreted by private company financial statement users as being more precise than an estimate. A user PCC member stated that he would expect most users to understand that the disclosed information represents an estimate because the disclosed amounts are derived from an estimate.

BC112. Acknowledging that the disaggregated disclosure of income tax expense (or benefit) will be a new requirement for entities other than public business entities and the feedback received from private company stakeholders, the Board observed that when an entity that has domestic and foreign operations is preparing its income tax provision, it determines the income that is attributable to those domestic and foreign operations and then uses that income determination in estimating its federal, state, and foreign income tax expense (or benefit). The information provided in the disaggregated disclosures of pretax income (or loss) and of income tax expense (or benefit) would be expected to be estimates because those disclosures are highlighting the information that is used in the computation of the income tax provision.

BC113. The Private Company Decision-Making Framework states that when disclosures are being considered for private companies, the Board should first determine whether the disclosure provides relevant information to the most common types of users of private company financial statements and, if so, whether the information can be provided at a reasonable cost. The Board noted that user PCC members expressed support for the disaggregated disclosures. From a cost perspective, the Board noted that feedback was mixed; however, stakeholders did not indicate that the costs to provide that information would be unreasonable. As such, the Board concluded that the information could be provided at a reasonable cost.

BC114. On the basis of private company stakeholder feedback and an analysis of the Private Company Decision-Making Framework, the Board decided to require that entities other than public business entities provide the same disaggregated disclosures on income (or loss) from continuing operations before income tax and income tax expense from continuing operations (or benefit) as do public business entities.

BC115. The Board decided that the amendments in this Update should be applied on a prospective basis and that retrospective application to all periods presented is permitted. The Board decided that the amendments should be effective for public business entities for annual periods beginning after December 15, 2024. The Board decided that for entities other than public business entities, the amendments should be effective for annual periods beginning after December 15, 2025. The Board decided to permit early adoption for annual financial statements that have not yet been issued or made available for issuance.

BC116. To improve comparability and consistency of income tax information disclosed, the Board proposed that the amendments in the proposed Update should be applied retrospectively. The Board observed that because the information that would be required under the proposed amendments should be readily available or could be acquired through existing processes or systems, retrospective transition would not be expected to result in significant cost or complexity. However, the Board acknowledged that entities may incur additional costs or need additional time to collect and compile the information needed to comply with certain proposed amendments.

BC117. Some respondents supported the proposed retrospective transition method, noting that it would be operable because of the availability of historical information and because it would provide comparable and decision-useful information. Other respondents expressed concerns about the cost and complexity in applying the amendments in the proposed Update retrospectively and asserted that the information resulting from retrospective transition would not provide decision-useful information. Several respondents recommended that the Board allow either prospective or retrospective transition. During investor outreach, many investors supported a prospective transition method if that method would result in gaining access to the enhanced disclosures sooner through an earlier effective date. In other words, investors generally indicated that they would prioritize an earlier effective date over a retrospective transition method.

BC118. Board members noted that requiring a prospective transition method (with a retrospective option permitted) and an earlier effective date compared with requiring a retrospective transition and a longer effective date will provide investors with the decision-useful information sooner and most appropriately achieves the Board’s objective in this project. Additionally, the Board noted that the retrospective option, which should be applied to all amendments in this Update, provides entities that have ready access to comparative data with the ability to adopt retrospectively.

BC119. Some respondents stated that the amendments in the proposed Update should not require a significant amount of time to implement because the changes are straightforward and public business entities likely have the information available; therefore, they suggested an effective date of one year (or at least one year) after the issuance of the final Update. Other respondents suggested a range of two to five years for public business entities to implement the amendments to provide adequate time to update systems, procedures, and internal controls, as well as gather necessary data.

BC120. The Board noted that the amendments generally are an expansion of the existing disclosures and that public business entities generally have the information available to prepare those expanded disclosures. The Board concluded that the effective date (combined with the prospective transition method) will provide public business entities with the necessary time to review and gather the information and update systems and internal controls, while balancing the needs of investors to receive the information in a timely manner.

BC121. Some respondents provided feedback on whether entities other than public business entities would need more time than public business entities to implement the amendments in this Update. Almost all of those respondents and feedback from PCC members indicated that entities other than public business entities should have one to two additional years for implementation. Considering stakeholder feedback and the Private Company Decision-Making Framework, which states that because of private companies’ resource limitations and the learning cycle, generally amendments should be effective for private companies one year after the first annual period for which public business entities are required to adopt, the Board decided to provide entities other than public business entities with an additional year to implement the amendments.

BC122. Almost all respondents that provided feedback on whether early adoption should be permitted indicated that it should be permitted. With its decision to allow entities to early adopt the amendments in this Update, the Board clarified that an entity that elects to early adopt the amendments should do so for annual financial statements that have not yet been issued or made available for issuance. The Board noted that it would not be operational to early adopt the rate reconciliation amendments on an interim basis because the details to provide a full rate reconciliation disclosure on an interim basis would not be available.

The amendments to the FASB Accounting Standards Codification® in this Accounting Standards Update require improvements to the GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy (collectively referred to as the “GAAP Taxonomy”). Those improvements, which will be incorporated into the proposed 2024 GAAP Taxonomy, are available through GAAP Taxonomy Improvements provided at www.fasb.org, and finalized as part of the annual release process.