ASU 2023-09, Improvements to Income Tax Disclosures, changes the income tax note without changing how the provision is calculated. The numbers in the tax expense line stay the same. What changes is the disclosure a reader sees: a more detailed rate reconciliation for public business entities, a new disclosure of income taxes paid for every entity, and a qualitative reconciliation requirement for entities that are not public business entities. For a CPA firm with private clients, the date that matters is annual periods beginning after December 15, 2025.
This guide separates what applies to public business entities from what applies to everyone else, walks through the 5 percent threshold with numbers and lists the tie-outs the auditor performs on the new disclosures.
Who must do what?
| Requirement | Public business entities | Other entities |
|---|---|---|
| Rate reconciliation | Tabular, in percentages and reporting-currency amounts, using specified categories | Qualitative disclosure of the specific categories of reconciling items and individual jurisdictions that cause a significant difference between the statutory and effective rate |
| Income taxes paid, net of refunds | Federal, state and foreign, with individual jurisdictions at or above 5 percent of the total shown separately | Same |
| Income tax expense and pretax income | Domestic and foreign pretax income from continuing operations, and expense split federal, state and foreign | Same |
| Effective date | Annual periods beginning after December 15, 2024 | Annual periods beginning after December 15, 2025 |
Adoption is prospective, with retrospective application permitted. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.
What are the rate reconciliation categories?
For a public business entity, the tabular reconciliation uses eight categories:
- State and local income tax, net of federal 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
Items in the cross-border tax laws, tax credits and nontaxable or nondeductible categories that reach the threshold are disaggregated by nature. Foreign tax effects are disaggregated by jurisdiction and nature.
Entities other than public business entities may omit the numerical reconciliation. They describe the categories and jurisdictions that cause a significant gap between the statutory and the effective rate. The qualitative text still has to be right, and the auditor can only test it against the same support a numeric table would use. Keep a private-company rate reconciliation workpaper in numeric form even when the note is narrative.
How is the 5 percent threshold calculated?
The threshold equals pretax income or loss from continuing operations multiplied by the applicable federal rate, multiplied by 5 percent. Reconciling items at or above the threshold are disclosed separately.
An illustration with round numbers:
| Line | Amount |
|---|---|
| Pretax income from continuing operations | 4,000,000 |
| Federal statutory rate | 21% |
| Tax at statutory rate | 840,000 |
| Threshold, 5 percent of statutory-rate tax | 42,000 |
A nondeductible meals and entertainment item that adds $18,000 to tax is below the threshold. A credit of $60,000 is above it and is disclosed separately by nature. The threshold applies to the amount of each item, so a $42,000 item sits exactly on the line and is included.
Income taxes paid has its own 5 percent test: an individual jurisdiction is shown separately when its net income taxes paid are at least 5 percent of the total net income taxes paid.
What was removed?
The ASU eliminates the requirement for all entities to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits in the next 12 months. It also removes 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 for subsidiaries and corporate joint ventures. Remove them from the checklist for periods after adoption.
Worked tie-out
The note is a summary of the provision file. A sound disclosure draws every figure from a place the auditor can inspect. An illustration for a private company's income taxes paid disclosure:
| Jurisdiction | Cash paid | Refunds received | Net paid |
|---|---|---|---|
| Federal | 610,000 | (20,000) | 590,000 |
| State, total | 190,000 | 0 | 190,000 |
| Foreign | 0 | 0 | 0 |
| Total | 800,000 | (20,000) | 780,000 |
The jurisdiction threshold here is 5 percent of $780,000, or $39,000. A single state with $120,000 of net payments is at or above it and is listed by name. The remaining states can be grouped.
The related journal entry is not a new entry. It is the existing cash payment of estimated tax:
| Account | Debit | Credit |
|---|---|---|
| Income taxes payable or prepaid income taxes | 800,000 | |
| Cash | 800,000 |
The new work is classifying the payments by jurisdiction in the ledger. Bank-feed memos that say "IRS" or "state tax" are a starting point, not a classification.
Audit angle
The auditor treats the new disclosures as a presentation and disclosure assertion, supported by the evidence standards in /us/standards/au-c-500. A practical program:
- Taxes paid. Agree each payment to a bank statement or payment confirmation, assign it to federal, state or foreign, and compute the 5 percent jurisdiction test.
- Refunds. Net refunds received against payments in the same period and agree to the cash receipts journal.
- Reconciliation. Recompute tax at the statutory rate, agree each reconciling item to the provision workpaper and compute the 5 percent threshold.
- Category completeness. Compare the tax credit schedule, the valuation allowance rollforward and the unrecognized tax benefit rollforward to the reconciling items disclosed. See /us/blog/asc-740-income-taxes-private-companies for the provision itself. The standards summary is at /us/standards/asu-2023-09-income-tax-disclosures.
- Qualitative text for nonpublic entities. Trace each statement in the narrative to a numeric reconciling item.
- Transition. Check the adoption method and that the comparative periods follow it.
Common misstatements: using book pretax income instead of pretax income from continuing operations, applying the 5 percent test to the effective rate rather than the statutory-rate amount, netting state refunds against federal payments, and leaving the eliminated disclosures in the note.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- RSM US, FASB issues final standard on income tax disclosures: https://rsmus.com/insights/financial-reporting/fasb-issues-final-standard-on-income-tax-disclosures.html
- CohnReznick, Recent and upcoming accounting standards updates for public and non-public companies (effective dates, 5 percent threshold): https://www.cohnreznick.com/insights/asu-updates-for-public-and-non-public-companies
- FASB, ASU 2023-09 (PDF): https://storage.fasb.org/ASU%202023-09.pdf
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error