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16.6 Disclosures related to income statement income tax amounts (after adoption of ASU 2023-09)
Publication date: 31 May 2024
us Financial statement presentation guide
ASC 740-10-50-9 through ASC 740-10-50-14 require certain disclosures about income statement amounts related to income taxes. In addition, as discussed in ASC 740-10-50-14, the nature and effect of any significant matters affecting comparability of information for all periods presented (unless otherwise evident from other disclosures) should be disclosed.
16.6.1 Income (or loss) and income tax expense or benefit from continuing operations
As discussed in ASC 740-10-50-10, entities are required to disclose the amount of income tax expense or benefit allocated to continuing operations. In practice, this is frequently presented on the face of the income statement. In addition, entities must also disclose amounts separately allocated to other categories of income in accordance with the intraperiod tax allocation provisions, such as discontinued operations and a cumulative effect of a change in accounting principle.
ASC 740-10-50-10A requires all entities to disaggregate income (or loss) from continuing operations before income tax expense (or benefit) between domestic and foreign, and ASC 740-10-50-10B requires all reporting entities to disaggregate income tax expense (or benefit) from continuing operations by federal (national), state, and foreign.
Income taxes on foreign earnings that are imposed by the jurisdiction of domicile should be included in the amount for that jurisdiction of domicile (that is, the jurisdiction imposing the tax). Similarly, income taxes paid to a foreign jurisdiction by the domestic parent should be included in the jurisdiction imposing the tax rather than the jurisdiction of the entity paying the tax.
16.6.2 Effective tax rate reconciliation
As discussed in ASC 740-10-50-12, PBEs are required to provide a tax rate reconciliation that reconciles income tax expense (or benefit) attributable to continuing operations to the applicable statutory federal (national) income tax rate applied to pretax income (or loss) from continuing operations (see FSP 16.10 for non-PBE disclosure requirements). PBEs not domiciled in the United States should normally use the income tax rate in the parent entity’s country of domicile. When a rate other than the US federal corporate income tax rate is used, the rate and basis for using that rate should be disclosed.
PBEs are required to present the reconciliation using both reporting currency amounts and percentages. The reconciliation should include specific categories as well as separate disclosure of any reconciling items within certain categories that are equal to or greater than 5% of the amount computed by multiplying the income (or loss) from continuing operations before income taxes by the applicable statutory federal (national) income tax rate of the country of domicile. That is, if the absolute value of the effect of the reconciling item is equal to or greater than the absolute value of 5% of the product of the income or loss from continuing operations before income tax and the applicable statutory federal income tax rate, the reconciling item must be separately disclosed for certain categories.
16.6.2.1 Specific categories
For PBEs, ASC 740 requires the use of eight specific categories within the rate reconciliation that are prescribed in ASC 740-10-50-12A(a). Gross presentation of all reconciling items is required unless specific guidance permits net presentation.
Excerpt from ASC 740-10-50-12A
For each annual reporting period, a public business entity shall disclose a tabular reconciliation, using both percentages and reporting currency amounts, according to the following requirements:
- The following specific categories shall be disclosed:
- State and local income tax, net of federal (national) income tax effect
- 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
- Changes in unrecognized tax benefits.
The starting point for the reconciliation should generally be the federal (national) statutory rate in the reporting entity’s jurisdiction (country) of domicile. As a result, all of the categories (except the changes in unrecognized tax benefits category, as discussed below) are considered through that lens.
- The state and local income tax category should include income taxes imposed by state and local jurisdictions in the jurisdiction (country) of domicile.
- The foreign tax effects category should include all income taxes imposed by jurisdictions outside of the country of domicile.
- Categories 3 through 7 should only include federal (national) income tax impacts imposed by the jurisdiction (country) of domicile. For example, the cross-border tax effects category only includes cross-border taxes that are imposed by the jurisdiction (country) of domicile. Similarly, the valuation allowance category only reflects the change in valuation allowance related to federal (national) taxes in the jurisdiction (country) of domicile. Any change in valuation allowance in a foreign jurisdiction would be included in the foreign tax effects category and would be separately disclosed as a reconciling item if the impact meets the quantitative threshold.
The changes in unrecognized tax benefits category may include reconciling items for all jurisdictions on an aggregate basis.
When disaggregating reconciling items by nature is required, an entity should consider the reconciling item’s fundamental or essential characteristics, such as the event that caused the reconciling item and the activity with which the reconciling item is associated.
If a reconciling item does not fall into any specific category, the entity is required to disclose the reconciling item separately as an “other adjustment” in the tabular reconciliation if it meets the 5% threshold.
ASC 740-10-50-12C requires a PBE to provide a qualitative explanation of individual reconciling items if not otherwise evident. Qualitative disclosure might include the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items.
Question FSP 16-4
Are required categories or reconciling items required to be presented if they are not material?
Are required categories or reconciling items required to be presented if they are not material?
PwC response
No. ASC 105-10-05-06 states that the provisions of the Codification need not be applied to immaterial items. The Basis for Conclusions of ASU 2023-09 explicitly indicates that an entity need not separately disclose (1) the required specific categories or reconciling items if they are immaterial, even if the quantitative threshold is met, or (2) income taxes paid for any jurisdiction (whether federal, state, or foreign groupings or individual jurisdictions are over 5%) if the amount is not material.
16.6.2.2 State and local tax, net of federal (national) income tax effect
The state and local income tax category reflects income taxes imposed at the state or local level within the jurisdiction (country) of domicile.
A qualitative description of the state and local jurisdictions that make up the majority (greater than 50%) of the effect of the state and local income tax category is also required. For the purpose of identifying the state and local jurisdictions that make up the majority of the effect, a PBE should begin with the state or local jurisdiction that has the largest effect and, in descending order, add state or local jurisdictions with the next largest effect until the aggregated effect is greater than 50%.
16.6.2.3 Foreign tax effects
The foreign tax effects category reflects income taxes imposed by foreign jurisdictions. Within the foreign tax effects category, reconciling items are required to be disaggregated by both jurisdiction (country) and by nature (including statutory rate differentials) if either or both are over the 5% quantitative threshold.
A foreign jurisdiction that meets the 5% threshold should be separately disclosed as a reconciling item. In addition, if any individual reconciling item within a foreign jurisdiction meets the 5% threshold, that reconciling item should be separately disclosed by nature and jurisdiction regardless of whether the jurisdiction exceeds the threshold in total. For example, a statutory tax rate difference between a foreign jurisdiction (country) and the jurisdiction (country) of domicile that meets the 5% threshold should be separately disclosed as a reconciling item within the foreign jurisdiction, even if the jurisdiction as a whole does not meet the 5% threshold.
16.6.2.4 Effect of changes in tax laws or rates enacted in the current period
ASC 740 defines this category to include the cumulative tax effects of a change in enacted tax laws or rates on current or deferred tax assets and liabilities at the date of enactment.
The tax effects included in this category are intended to be consistent with existing guidance in ASC 740 related to the effects of changes in tax laws or rates and the requirement for those effects, both current and deferred, to be included in the tax provision attributable to continuing operations in the period that includes the enactment date.
16.6.2.5 Effect of cross-border tax laws
ASC 740-10-50-12A(c)(3) defines the effect of cross-border tax laws category as the effect of incremental income taxes imposed by the jurisdiction (country) of domicile on income earned in foreign jurisdictions. Individual reconciling items within the effect of cross-border tax laws category are required to be separately disclosed if over the 5% threshold.
The tax effect of both the cross-border tax and any related tax credit provided by the jurisdiction (country) of domicile on the same income during the same reporting period may be presented on a net basis in the effect of cross-border tax laws category. This effectively means that a credit in the same jurisdiction, which is an inherent part of the calculation of a cross-border tax, may be netted with the cross-border tax law effect. For example, the impact of global intangible low-taxed income (GILTI) and its related foreign tax credits (GILTI FTCs) may be presented as one net reconciling item.
16.6.2.6 Tax credits
The tax credits category should reflect the effect of tax credits provided by the jurisdiction (country) of domicile. Individual reconciling items within the tax credits category should be separately disclosed if over the 5% threshold.
16.6.2.7 Changes in valuation allowances
The changes in valuation allowance category includes the income tax effect of valuation allowances initially recognized or subsequently adjusted in the reporting period in the jurisdiction (country) of domicile. For example, a US-domiciled reporting entity that establishes a full valuation allowance on its federal deferred tax assets would present the initial impact to record the valuation allowance on both its beginning-of-year deferred tax assets and deferred tax assets generated in the current year in aggregate within the changes in valuation allowance category.
16.6.2.8 Nontaxable or nondeductible items
This category reflects the tax effect of nontaxable or nondeductible items in the jurisdiction (country) of domicile. Individual reconciling items within the nontaxable or nondeductible items category should be separately disclosed if over the 5% threshold.
Reporting entities may need to apply judgment when determining what reconciling items may be included in this category. For example, excess tax benefits related to share-based payments are arguably neither “nontaxable” nor “nondeductible.” However, despite feedback received in comment letters, the FASB did not provide specific guidance in ASU 2023-09 on the disclosure of the rate-reconciling impact related to excess tax benefits on share-based payment awards. The FASB, however, indicated in the Basis for Conclusions of the ASU that it does not believe that excess benefits and shortfalls must be viewed as separate reconciling items, and therefore it affirmed that the impact of share-based payment awards could be viewed as a single reconciling item within the nontaxable or nondeductible items category.
16.6.2.9 Changes in unrecognized tax benefits
The changes in unrecognized tax benefits category includes the tax effect of changes in judgment related to tax positions taken in prior annual reporting periods. Uncertain tax benefits related to current year tax positions may be shown net with the reconciling item that relates to the uncertain tax position. For example, if a reporting entity generates federal research and development (R&D) credits in the current period, the rate reconciling item related to the R&D credit benefit could be presented in the tax credits category net of any associated unrecognized tax benefit (assuming the R&D credit net of uncertain tax benefit meets or exceeds the 5% threshold).
Entities are permitted to aggregate changes in unrecognized tax benefits for all jurisdictions within the changes in unrecognized tax benefits category.
16.6.3 Significant components of income tax expense
Both PBEs and non-PBEs are required to disclose significant components of income tax expense attributable to continuing operations.
The significant components of income tax expense attributable to continuing operations for each year presented shall be disclosed in the financial statements or notes thereto. Those components would include, for example:
- Current tax expense (or benefit)
- Deferred tax expense (or benefit) (exclusive of the effects of other components listed below)
- Investment tax credits
- Government grants (to the extent recognized as a reduction of income tax expense)
- The benefits of operating loss carryforwards
- Tax expense that results from allocating certain tax benefits directly to contributed capital
- Adjustments of a deferred tax liability or asset for enacted changes in tax laws or rates or a change in the tax status of the entity
- Adjustments of the beginning-of-the-year balance of a valuation allowance because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years. For example, any acquisition-date income tax benefits or expenses recognized from changes in the acquirer’s valuation allowance for its previously existing deferred tax assets as a result of a business combination (see paragraph 805-740-30-3).
The sum of the amounts disclosed for the components of tax expense should equal the amount of tax expense that is reported in income from continuing operations. Insignificant components can be grouped in an “other” category. These items are typically discussed in a narrative disclosure.
ASC 740-10-55-212 through ASC 740-10-55-216 provides three examples that illustrate this disclosure requirement.
16.6.3.1 Investment tax credit disclosures
ASC 740-10-50-20 requires disclosures detailing the method of accounting (either the deferral method or the flow-through method) used to account for investment tax credits and the amounts involved. See TX 3 for investment tax credit accounting considerations.
16.6.3.2 Current and deferred taxes for changes in tax laws, rates, or status
As discussed in FSP 16.5.3, the effects of changes in tax laws or rates are recognized in income from continuing operations in the period that includes the enactment date. The tax effect of the enacted tax rates on current and deferred tax assets and liabilities should be determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment (see TX 7.3).
Changes in tax rates may be retroactive to the beginning of the current year. In these instances, we believe it would generally be sufficient to disclose (1) the effect of the rate change on beginning-of-year deferred tax balances, and (2) the effect of the rate change on current and deferred taxes provided prior to the enactment date. Both of these items should be considered in the rate reconciliation. In any case, the amount(s) disclosed should be clearly described.
As discussed in ASC 740-10-45-19, if a reporting entity experiences a change in tax status (e.g., change from a nontaxable partnership to a taxable corporation), the deferred tax effects of that change should be disclosed as a component of income tax expense attributable to continuing operations. See TX 8.1 for discussion of changes in tax status.
16.6.4 Disclosures for investments in tax credit structures (after adoption of ASU 2023-02)
ASC 323-740 addresses investments in tax credit structures that provide income tax credits and other income tax benefits associated with the development of certain types of projects, such as low-income housing, rehabilitation of historic structures, investments in the infrastructure of economically-challenged geographic areas, and renewable energy projects such as solar and wind. Provided certain criteria are met, investors can make an election to apply the proportional amortization method to such investments.
New guidance
ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), expanded the availability of the proportional amortization method (PAM), previously allowed only for investments in low-income housing tax credit structures, to equity investments in other tax credit structures that meet certain criteria. See TX 3.3.6 for guidance regarding the application of PAM and the effective date of ASU 2023-02.
The disclosure requirements in ASC 323-740-50-1 through ASC 323-740-50-2 are meant to provide financial statement users with information about a reporting entity’s investments in tax credit structures and their impact on reported financial results, including amounts reflected in the balance sheet, income statement, and statement of cash flows from these investments.
These disclosures are required not only for investments accounted for under PAM, but all investments within the tax credit programs for which the reporting entity has elected to apply PAM, including investments within that elected program that do not meet the conditions to apply PAM. A reporting entity could also choose to provide information about investments in tax credit programs for which the entity has elected not to apply PAM to better highlight amounts reflected in pre-tax income and income tax expense associated with all investments in tax credit structures.
The following disclosure requirements are applicable for both annual and interim periods:
To meet the objectives in paragraph 323-740-50-1, a reporting entity shall disclose the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program for which it has elected on a tax-credit-program-by-tax-credit-program basis to apply the proportional amortization method, including investments within that elected tax credit program that do not meet the conditions in paragraph 323-740-25-1:
- The amount of income tax credits and other income tax benefits recognized during the period, including the line item in the statement of operations and statement of cash flows in which it has been recognized
- The amount of investments and the line item in which the investments are recognized in the statement of financial position
- For investments accounted for using the proportional amortization method, the amount of investment amortization recognized as a component of income tax expense (benefit)
- For investments accounted for using the proportional amortization method, the amount of non-income-tax-related activity and other returns received that is recognized outside of income tax expense (benefit) and the line item in the statement of operations and statement of cash flows in which it has been recognized
- For investments accounted for using the proportional amortization method, significant modifications or events that resulted in a change in the nature of the investment or a change in the relationship with the underlying project.
In accordance with ASC 323-740-50-2, a reporting entity should also consider the following disclosures:
- The amount of investment income or loss included in pretax income (for investments accounted for using the equity method)
- Any commitments or contingent commitments (e.g., guarantees or commitments to provide additional capital contributions), including the amount of delayed equity contributions and the year(s) in which contingent commitments are expected to be paid
- The amount and nature of impairment losses during the year resulting from the forfeiture or ineligibility of income tax credits or other circumstances (e.g., in a qualified affordable housing project investment, those impairment losses may be based on actual property-level foreclosures, loss of qualification due to occupancy levels, compliance issues with tax code provisions, or other issues)
In addition to the ongoing disclosure requirements discussed in this section, reporting entities must make disclosures regarding the transition to the new guidance in ASU 2023-02, consistent with ASC 250 on accounting changes and error changes, in the financial statements of both the interim period of the change and the fiscal year of the change.
See ASC 323-740-50 for disclosure considerations prior to the adoption of ASU 2023-02.
16.6.5 Additional income tax disclosures for SEC registrants
SAB Topic 11.C, Tax Holidays (codified in ASC 740-10-S99-2), requires disclosure of tax holidays from income taxes that the reporting entity has been granted for a specified period. The disclosure should include the aggregate dollar and per-share effects of the tax holiday and briefly describe the facts and circumstances, including the date on which the special tax status will terminate.
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