In December 2023 the US Financial Accounting Standards Board issued Accounting Standards Update 2023-09, Improvements to Income Tax Disclosures. Investors had long asked for better insight into companies' tax risks and cash taxes; the update responds by expanding two core disclosures.
For public business entities the amendments are effective for annual periods beginning after 15 December 2024. That makes calendar-year 2025 financial statements the first to include the new disclosures — and year-end reporting is now close.
A more granular rate reconciliation
Public business entities must now present a tabular rate reconciliation using specific categories, including state and local income tax, foreign tax effects, the effect of changes in tax laws, cross-border tax laws, tax credits, valuation allowances, nontaxable or nondeductible items and changes in unrecognised tax benefits.
Reconciling items that meet a quantitative threshold — 5% of the amount computed by multiplying pre-tax income by the applicable statutory rate — must be separately disclosed, both in percentages and in reporting currency amounts. Foreign tax effects must be further disaggregated by jurisdiction where the threshold is met.
Income taxes paid, broken down
All entities must disclose income taxes paid, net of refunds, disaggregated between federal, state and foreign taxes, and further by individual jurisdiction where payments equal or exceed 5% of total income taxes paid.
This disclosure gives investors a clearer view of where a group's cash taxes are actually going, which can differ significantly from the tax expense recognised in the income statement.
Data is the real challenge
Many tax departments historically prepared the rate reconciliation at a relatively high level. The new categories and thresholds require more detailed data by jurisdiction, and cash tax information often sits in different systems from provision data.
Companies that performed dry runs using 2024 data generally found gaps in mapping foreign items and in tracking payments by jurisdiction — gaps that are far easier to close before the audit than during it.
What auditors will look for
Auditors will test the completeness and categorisation of reconciling items, the application of the 5% threshold and the accuracy of disaggregated payments. Clear documentation of judgements — for example, how cross-border items such as GILTI or Pillar Two top-up taxes are categorised — will help avoid last-minute adjustments.
Conclusion
ASU 2023-09 does not change how income taxes are calculated, but it makes tax positions far more visible to investors. A well-prepared first year sets the template for every year that follows.
