The rate reconciliation under ASU 2023-09

In this lesson you will

List the eight specific categories a public business entity must present
Apply the 5 percent threshold to decide which items need separate disclosure
Contrast the public business entity tabular reconciliation with the qualitative disclosure for other entities
State the effective dates and transition method of ASU 2023-09

Why the reconciliation changed

Before ASU 2023-09, a public entity could present the rate reconciliation in percentages or dollar amounts and pick its own line items, with significant items shown separately. Investors asked for consistency. ASU 2023-09 rewrote ASC 740-10-50-12 through 50-13 and added a structure every public business entity (PBE) must follow.

The PBE requirements

Under ASC 740-10-50-12, a PBE reconciles reported income tax expense from continuing operations to the amount computed by multiplying pretax income from continuing operations by the applicable statutory federal (national) rate of its country of domicile. For a U.S. company that rate is 21 percent. A non-U.S. parent uses its home country's national rate and discloses the rate and the basis for using it.

ASC 740-10-50-12A requires a table using both percentages and reporting currency amounts, with these eight specific categories:

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 5 percent threshold

Separate disclosure is required for any reconciling item whose effect is equal to or greater than 5 percent of pretax income from continuing operations multiplied by the statutory rate. Then:

Items in the cross-border, tax credit, or nontaxable and nondeductible categories are disaggregated by nature.
Items in the foreign tax effects category are disaggregated by jurisdiction and by nature. A foreign country that meets the threshold is shown separately, and within any foreign country an item of one nature that meets the threshold is shown separately.
Items that fit no category are disaggregated by nature.

Items are presented gross, with two exceptions in 50-12A(c): an unrecognized tax benefit recorded for a current-year position may be netted with that position, and a cross-border tax may be netted with the related credit (the standard's example is global intangible low-taxed income and its foreign tax credits).

State and local taxes are categorized as state-level taxes within the country of domicile. Under 50-12B, a PBE also describes qualitatively the states that make up more than 50 percent of the state category, adding jurisdictions from largest effect down until the total passes 50 percent. Under 50-12C, it explains reconciling items whose nature or cause is not evident.

Entities other than PBEs

ASC 740-10-50-13 requires a private company to disclose qualitatively the nature and effect of the specific categories of significant reconciling items and individual jurisdictions that cause a significant difference between the statutory and effective rates. No numerical reconciliation is required. ASC 740-10-55-232 through 55-233 gives an illustration in a few sentences.

Effective dates and transition

PBEs apply the amendments for annual periods beginning after December 15, 2024. All other entities apply them for annual periods beginning after December 15, 2025. Early adoption is permitted for financial statements not yet issued or made available for issuance. Transition is prospective, with retrospective application permitted. A calendar-year private company first applies the rules in its 2026 statements.

Audit focus

The reconciliation is a disclosure and an analytical check on the provision. Recompute the statutory line, recompute the threshold, then tie every reconciling item to the provision workpapers. Check category placement: a foreign item in the federal credit line or a valuation allowance change netted inside state taxes are both errors. The rate reconciliation template and the ASU 2023-09 standard page lay out the layout. The other disclosures from ASU 2023-09 are covered in the disclosures lesson.

Worked example

Applying the threshold for Northgate Fabrication Holdings, Inc. (a PBE)

Northgate is domiciled in the United States with pretax income from continuing operations of $10,000,000, all domestic. Provision workpapers show:

State income tax of $400,000, deductible federally, so the federal benefit is 400,000 x 21% = $84,000 and the net state effect is $316,000
Federal research credit of $150,000
Nondeductible executive compensation creating $90,000 of tax
Increase in unrecognized tax benefits of $60,000 for prior-year positions

Statutory line: 10,000,000 x 21% = $2,100,000.

Threshold: 2,100,000 x 5% = $105,000.

Reconciliation:

U.S. federal statutory: $2,100,000 (21.00%)
State and local, net of federal effect: $316,000 (3.16%)
Tax credits, research credit: ($150,000) (-1.50%)
Nontaxable or nondeductible items: $90,000 (0.90%)
Changes in unrecognized tax benefits: $60,000 (0.60%)
Effective tax: $2,416,000 (24.16%)

Check: 2,100,000 + 316,000 - 150,000 + 90,000 + 60,000 = $2,416,000, and 2,416,000 / 10,000,000 = 24.16 percent.

The research credit ($150,000) is at least $105,000, so it is disaggregated by nature within tax credits. The $90,000 nondeductible item is below the threshold, so it is not broken out further. Northgate also describes the states making up more than half of the $316,000 state effect.

Self-check

Answer each question before you open the answer.

What base is used to compute the 5 percent threshold?
Show answer
Pretax income (or loss) from continuing operations multiplied by the applicable statutory federal (national) rate of the country of domicile. For a U.S. company with $10 million of pretax income, the base is $2.1 million and the threshold is $105,000.
Does a private company have to present a numerical rate reconciliation under ASU 2023-09?
Show answer
No. ASC 740-10-50-13 requires qualitative disclosure of the nature and effect of significant reconciling item categories and jurisdictions, but a numerical reconciliation is not required.
When must a calendar-year private company first apply ASU 2023-09?
Show answer
For its 2026 annual statements, because entities other than PBEs apply it for annual periods beginning after December 15, 2025. Early adoption is permitted.
Can a PBE net the tax on global intangible low-taxed income with its related foreign tax credits?
Show answer
Yes. ASC 740-10-50-12A(c) permits a cross-border tax and its related credit in the same period to be presented net in the effect of cross-border tax laws category, and uses that pair as its example.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error