ASU 2023-09 Income Tax Disclosures: Rate Reconciliation and Taxes Paid

FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, on December 14, 2023. It does not change how income taxes are measured or recognized. It changes what the notes say, mainly the rate reconciliation and the income taxes paid disclosure, in response to investor requests for more detail about taxes across jurisdictions. For private companies and their auditors the first year of application is the annual period beginning after December 15, 2025, which for a calendar-year entity is the 2026 financial statements. This page covers who must disclose what, the mechanics of the new tables, and how to prepare. For measurement and uncertain positions, see ASC 740-10 uncertain tax positions.

When is ASU 2023-09 effective?

Early adoption is permitted for annual financial statements that have not been issued or made available for issuance. Entities adopt prospectively, and retrospective application is permitted. A calendar-year PBE therefore applies the standard to 2025, and a calendar-year private company to 2026. A private company with a June 30 fiscal year first applies it to the year beginning July 1, 2026 and ending June 30, 2027.

The ASU also replaces the term "public entity" with "public business entity" in the Topic 740 disclosure paragraphs, which changes which entities owe the heavier disclosures.

What must all entities disclose?

Three items apply to every entity subject to the income tax disclosure requirements, including private companies and not-for-profits with taxable activity.

1. Income before tax by geography. Income (or loss) from continuing operations before income tax, split between domestic and foreign (ASC 740-10-50-10A).
2. Income tax expense by jurisdiction. Income tax expense (or benefit) from continuing operations split between domestic federal, domestic state and foreign (ASC 740-10-50-10B).
3. Income taxes paid. Income taxes paid, net of refunds received, split between federal, state and foreign, plus separate amounts for each individual jurisdiction in which net payments are 5 percent or more of total net income taxes paid (ASC 740-10-50-22 and 50-23).

Before the ASU, the cash flow disclosure required only total income taxes paid.

What does a PBE disclose in the rate reconciliation?

A PBE presents a tabular reconciliation between expected tax (pretax income times the statutory rate) and reported tax, using both percentages and amounts. Reconciling items are grouped into specific categories:

• state and local income taxes, 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

Some categories must be broken out further when an item is 5 percent or more of the expected tax: by nature for items in the federal tax credit, nondeductible, cross-border and other categories, and by country for foreign tax effects. Items are presented gross unless netting is allowed. A PBE using a statutory rate other than the US federal rate discloses the rate and the basis for using it.

What do private companies disclose instead?

An entity that is not a PBE does not present the table. It gives a qualitative description of the nature and effect of the significant reconciling items, using the same categories, and of individual jurisdictions that result in significant reconciling items, for each year an income statement is presented (ASC 740-10-50-13). In practice that is a few sentences, such as "the effective rate differs from the statutory rate primarily because of state income taxes and nondeductible meals and entertainment." The preparer still needs the category-level numbers to write it accurately, and the auditor will ask for them.

ASU 2023-09 also removed some disclosures for all entities, including the statement about reasonably possible changes in unrecognized tax benefits within twelve months, covered on the uncertain tax positions page.

Worked illustration

Illustrative numbers, PBE rate reconciliation threshold. Pretax income is $10,000,000 and the federal statutory rate is 21 percent.

• Expected tax: $10,000,000 x 0.21 = $2,100,000
• 5 percent threshold: $2,100,000 x 0.05 = $105,000, equal to 1.05 percent of pretax income
• A federal research credit of $150,000 is above the threshold, so it is shown separately by nature. A $60,000 nondeductible expense is below it and can be grouped within its category.

Illustrative numbers, taxes paid (any entity). Total income taxes paid, net of refunds, are $2,000,000, made up of federal $1,300,000, State A $400,000, State B $60,000, State C $40,000 and Country X $200,000. The sum is $2,000,000.

• Threshold: $2,000,000 x 0.05 = $100,000
• The entity discloses federal $1,300,000, state total $500,000 and foreign $200,000, and separately names State A ($400,000) and Country X ($200,000) because each is at or above $100,000.
• States B and C are below the threshold and stay inside the state total.

What changes in the audit?

The financial statement audit tests the new numbers as it tests any other disclosure. Items to plan for:

• Source data for cash taxes. Payments and refunds by jurisdiction come from the cash disbursements ledger, state notices and the client's payment confirmations, not from the provision. Accounts that mix payroll taxes, franchise taxes and income taxes need to be separated.
• Pretax income split. Entities with foreign subsidiaries need domestic and foreign pretax income that agrees to consolidation schedules.
• Prior-year comparatives. Because adoption is prospective, a private company may present the new disclosures only for the adoption year. Retrospective application is optional.
• Disclosure checklist. Update the checklist for the ASU. The GAAP disclosure checklist is a starting point.
• Tie-out to the provision. Use the rate reconciliation template and the income tax provision workbook so category amounts agree to the expense in the statements.

Common problems

Practice observations, not requirements:

• The provision is prepared by an outside preparer on a net basis, so state expense is not available separately until requested.
• Cash taxes paid are not tracked by jurisdiction. A client with remote employees across many states may have dozens of small payments.
• Treating "all other entities" as exempt from the new work. The three all-entity disclosures apply to private companies too.

FAQ

Does ASU 2023-09 apply to private companies?

Yes, with lighter requirements. They give the domestic and foreign pretax income split, the expense split, the taxes-paid split, and a qualitative rate reconciliation. They are not required to present the tabular reconciliation.

What is the effective date for a calendar-year private company?

The 2026 annual financial statements, because the ASU is effective for annual periods beginning after December 15, 2025. Early adoption is permitted.

Is retrospective application required?

No. Adoption is prospective, and retrospective application is permitted.

What is the 5 percent test in the rate reconciliation?

A reconciling item is separately disclosed by nature or country when it is 5 percent or more of the expected income tax, which is pretax income times the statutory rate.

Sources

• FASB, Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (December 2023): https://www.fasb.org
• KPMG, Handbook: Accounting for Income Taxes (2025), paragraphs 1.018a, 9.085a, 9.090a-9.090y, 9.111; KPMG Defining Issues, FASB issues ASU to disaggregate income tax disclosures (December 2023): https://frv.kpmg.us/reference-library/2023/fasb-issues-asu-to-disaggregate-income-tax-disclosures.html
• RSM, FASB issues final standard on income tax disclosures: https://www.rsmus.com/insights/financial-reporting/fasb-issues-final-standard-on-income-tax-disclosures
• KPMG, Accounting standards effective dates (March 2026)

Related

• ASC 740-10 uncertain tax positions
• ASC 740 income taxes for private companies
• Rate reconciliation template
• Income tax provision workbook
• Deferred tax rollforward and valuation allowance
• GAAP disclosure checklist

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