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2023 accounting standards updates

Jan 29, 2024

The Financial Accounting Standards Board (FASB) was hard at work in 2023, issuing nine new accounting standards updates (ASUs). This year’s updates touch on common control leasing arrangements, joint ventures and tax credit projects, enhancements to reportable segment disclosures, long-anticipated crypto guidance and improvements to income tax disclosures.

Here is a detailed summary of the updates with their effective dates:

ASU 2023-01 — Leases (Topic 842)

Common Control Arrangements

As part of its post-implementation review process, the FASB issued 2023-01 as a response to concerns about applying Topic 842 to related-party arrangements between entities under common control.

Practical expedient for common control leases

The first issue this update helps to simplify is determining whether an arrangement is or contains a lease as defined within Topic 842.

In arrangements between related parties or entities under common control, arrangements do not always clearly define legally enforceable terms and conditions. Arrangements may also be verbal or unwritten. Because of this, many entities have wrestled with determining the legally enforceable terms in these arrangements when adopting Topic 842.

Through ASU 2023-01, the FASB offers a practical expedient allowing an entity to use the written terms and conditions as the legally enforceable terms and conditions.

Application of practical expedient:

Written terms and conditions exist:

No written terms and conditions:**

You don’t have to look beyond what’s written to evaluate whether there are other factors indicating that other terms and conditions exist.

You’re prohibited from applying practical expedient. Evaluate and determine what is legally enforceable, including unwritten terms and other factors.

**You’re permitted to document existing unwritten terms and conditions of an arrangement under common control prior to the issuance of financial statements.

The practical expedient is only available to entities that are not:

  1. Public business entities.
  2. Not-for-profit bond obligors.
  3. Employee benefit plans that file or furnish financial statements with the U.S. Securities and Exchange Commission.

It can be applied by an entity on an arrangement-by-arrangement basis.

Leasehold improvements

The second issue this update addresses is the amortization of leasehold improvements when arrangements between entities under common control determined to be leases are for a period shorter than the expected useful life of the leasehold improvements.

Topic 842, like the predecessor guidance in Topic 840, requires a lessee to amortize its leasehold improvements over the shorter of the remaining lease term or the useful life of the improvements. If a legally enforceable lease term was short term in nature, such as a month-to-month or one-year lease, a leasehold improvement would need to be amortized based on the short-term lease period.

Under ASU 2023-01, leasehold improvements in a common control lease can be amortized over the useful life of the leasehold improvements if the lessee controls the use of the underlying asset. Once the lessee no longer controls the underlying asset, the remaining unamortized balance would be accounted for as a transfer between entities under common control. It should be recorded as an adjustment through equity for for-profit entities or net assets for not-for-profit entities.

This accounting treatment is not limited to private companies and not-for-profit entities. It applies to all entities with leasehold improvements associated with leases between entities under common control.

Transition

If adopting the practical expedient concurrently with adopting Topic 842, entities are required to follow the same transition requirements used to apply Topic 842.

All other entities are required to apply the practical expedient in this update either:

  1. Prospectively to arrangements that commence or are modified on or after the date the entity first applies the practical expedient.
  2. Retrospectively to the beginning of the period in which the entity first applied Topic 842 for arrangements that exist at the date of adoption of the practical expedient. The practical expedient does not apply to common control arrangements no longer in place at the date of adoption of the amendments of this update.

It’s important to note that regardless of an entity’s transition approach, the entity is permitted to document any existing unwritten terms and conditions of a common control arrangement before the date on which the entity’s first interim or annual financial statements are available to be issued in accordance with the practical expedient in this update.

Effective date of ASU 2023-01

Annual and interim periods* — Fiscal years beginning after December 15, 2023

Early adoption is permitted for both interim and annual financial statements not yet made available for issuance.

*If adopted early in an interim period, the entity must adopt as of the beginning of the fiscal year that includes that interim period.

ASU 2023-02 — Investments —Equity Method and Joint Ventures (Topic 323)

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method

Under the current guidance of Subtopic 323-740, Investments — Equity Method and Joint Ventures — Income Taxes, the FASB allows the option to apply the proportional amortization method (PAM) accounting method for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met.

The PAM results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received. The amortization of the investment and the income tax credits are presented net in the income statement as a component of income tax expense (benefit). Equity investments in other tax credit structures were typically accounted for using the equity method or Topic 321, Investments — Equity Securities, which presents investment income, gains and losses, and tax credits at gross on the income statement.

The previous guidance was limited to investments in low-income housing tax credit (LIHTC) structures. However, a variety of tax credit programs are invested in through tax equity structures, including new market tax credits, historic rehabilitation tax credit programs and renewable energy tax credit programs. New tax credit programs for investors may also be created as a result of the Inflation Reduction Act of 2022.

This update expands the use of the PAM from LIHTC investments to equity investments in other tax credit structures that meet certain criteria, regardless of the tax credit program from which the income tax credits are received. It also removes the specialized guidance for LIHTC investments that are not accounted for using the PAM and requires those LIHTC investments to be accounted for using the guidance in other GAAP (such as Topic 321).

Policy election qualification

To qualify for the PAM, if elected, all the following conditions must be met:

  1. It is probable the income tax credits allocable to the tax equity investor will be available.
  2. The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.
  3. Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.
  4. The tax equity investor’s projected yield is based solely on the cash flows from the income tax credits and other income tax benefits is positive.
  5. The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment.

Additional application guidance

An accounting policy election can be made to apply the PAM on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the PAM at the reporting entity level or to individual investments.

If applying PAM to qualifying tax equity investments, the receipt of investment tax credits must be reported using the flow-through method under Topic 740, Income Taxes, even if the entity applies the deferral method for other investment tax credits received.

All tax equity investments accounted for using the PAM must recognize a liability for delayed equity contributions (guidance in Paragraph 323-740-25-23) that are:

  • Unconditional and legally binding or
  • Contingent upon a future event when that contingent event becomes probable.

LIHTC investments not accounted for using the PAM will no longer be permitted to use the delayed equity contribution guidance.

The update also removes the equity method impairment example for LIHTC investments in Subtopic 323-740. LIHTC investments accounted for using the equity method must apply the impairment guidance in Subtopic 323-10, Investments — Equity Method and Joint Ventures — Overall.

Disclosures

If an entity elects to apply the PAM, specific disclosures are also required for investments that generate income tax credits and other income tax benefits from a tax credit program:

  1. The nature of its tax equity investments
  2. The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations

The disclosures are required in annual and interim reporting periods.

Transition

The update must be applied on either a modified retrospective or retrospective basis.

Modified retrospective basis:

  • Evaluate all investments for which you still expect to receive income tax credits or other income tax benefits as of the beginning of the period of adoption.
  • Assess whether the investment that qualifies for the PAM is performed as of the date the investment was entered into.
  • Apply cumulative-effect adjustment reflecting the difference between the previous method used to account for the tax equity investment and the application of the PAM. The investment entered into is already included in the opening balance of retained earnings as of the beginning of the period of adoption.

Retrospective basis:

  • Evaluate all investments for which you still expect to receive income tax credits or other income tax benefits as of the beginning of the earliest period presented.
  • Assess whether the investment qualifies for the PAM as of the date the investment was entered into.
  • Apply cumulative-effect adjustment reflecting the difference between the previous method used to account for the tax equity investment and the application of the PAM. The investment entered into is already included in the opening balance of retained earnings as of the beginning of the earliest period presented.

LIHTCs that are no longer permitted to use (1) the cost method guidance in Paragraph 323-740-25-2A, (2) the equity method example in Paragraphs 323-750-55-8 through 55-9 or (3) the delayed equity contribution guidance in Paragraph 323-740-25-3 must either use its general transition method (modified retrospective or retrospective) or apply a prospective approach.

This election may be made separately for the three transition adjustment types described above. However, an entity should be consistent in its transition method for each transition adjustment type.

Under the prospective transition approach, an adjustment for affected LIHTC investments currently recorded on the date of adoption is recognized in current-period earnings, the balance sheet or both, on the date of adoption.

Effective dates of ASU 2023-02 by entity type

Effective date

Public business entities

All other entities

Annual and interim periods* — fiscal years beginning after

December 15, 2023

December 15, 2024

Early adoption is permitted for all entities in any interim period.

*If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

ASU 2023-03 — Presentation of Financial Statements (Topic 205), Income Statement — Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (505), and Compensation — Stock Compensation (Topic 718)

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 — General Revision of Regulation S-X: Income or Loss Applicable to Common Stock

ASU 2023-03 amends the FASB’s Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 — General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.

The ASU does not provide any new guidance so there is no transition or effective date associated with it. Content contained in the SEC sections of the codification is provided for convenience only and relates only to SEC registrants.

ASU 2023-04 — Liabilities (Topic 405)

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121

ASU 2023-04 amends the FASB’s codification for SEC paragraphs following the issuance of SEC Staff Accounting Bulletin No. 121 on obligations to safeguard crypto assets an entity holds for platform users.

The ASU does not provide any new guidance so there is no transition or effective date associated with it.

Content contained in the SEC sections of the codification is provided for convenience only and relates only to SEC registrants.

ASU 2023-05 — Business Combinations — Joint Venture Formations (Subtopic 805-60)

Recognition and Initial Measurement

The FASB issued ASU 2023-05 in August 2023 to provide guidance on the accounting for contributions received by entities that meet the definition of a joint venture or corporate joint venture upon formation. Existing joint ventures have the option to apply the guidance retrospectively.

Background

Prior to the issuance of the ASU, there was not specific authoritative guidance on how a joint venture should recognize and initially measure assets contributed and liabilities assumed, including the assets and liabilities of businesses contributed.

GAAP had simply stated that transactions between a corporate joint venture and its owners were outside the scope of Topic 845, Nonmonetary Transactions, and the formation of a joint venture is outside the scope of Topic 805, Business Combinations. This resulted in joint ventures accounting for contributions upon formation at the contributing venturer’s carrying amount whereas others used fair value.

Venturers are usually, but not always, the primary users of a joint venture’s financial statements. The use of fair value for net assets contributed upon formation is more relevant than the venturer’s carrying amounts and reduces equity method basis differences (the difference between the venturer’s cost of investment in a joint venture and the amount of underlying equity in net assets of the joint venture).

Defining a joint venture

The term “joint venture” is sometimes used to describe transactions that are not joint ventures.

Subtopic 805-60’s definition of a corporate joint venture includes the following characteristics that must be met to be considered a joint venture for accounting purposes:

  • The joint venture is owned and operated by a small group of entities as a separate and specific business or project for the mutual benefit of the group.
  • The risks and rewards are shared in developing a new market, product or technology; combining complementary technological knowledge; or pooling resources in developing production or other facilities.
  • There is usually an arrangement where each joint venturer may participate, directly or indirectly, in the overall management of the joint venture (relationships other than passive investors).
  • Ownership seldom changes, and its stock is usually not traded publicly. Noncontrolling interest held by a public ownership does not preclude a corporate form being a joint venture.
  • It is not a subsidiary of one of the joint venturers.

Main requirements

The amendments in this update require the following key changes from the business combinations guidance upon formation:

  1. A joint venture is the formation of a new entity. None of the assets and/or businesses contributed to the joint venture are considered as having survived the combination as an independent entity (i.e., an accounting acquirer will not be identified).
  2. A joint venture measures its identifiable net assets and goodwill, if any, at the formation date. As noted in the formation date section below, the formation date “is the date on which the entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date.” Contributions may be made by one or more parties at a later point in time. A joint venture is permitted to apply the measurement period guidance in Subtopic 805-10 if the initial accounting for a joint venture formation is incomplete by the end of the reporting period in which the formation occurs.
  3. Initial measurement of a joint venture’s total net assets is equal to the fair value of 100% of the joint venture’s equity. The fair value of the joint venture as a whole equals the fair value of 100% of a joint venture’s equity immediately following formation. The excess of the fair value of a joint venture as a whole over the net assets of the joint venture would be recognized as goodwill. In situations where the net assets of a joint venture exceed the fair value of the joint venture as a whole, the joint venture is required to recognize a “negative goodwill” as an adjustment to equity.
  4. A joint venture provides relevant disclosures. Joint venture disclosure requirements upon formation differ from the requirement for business combinations.

Formation date

The FASB has also updated the master glossary to provide users with a definition for the “formation date”:

The formation date of a joint venture is the date on which an entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date. The formation date is the measurement date for the formation transaction. If multiple arrangements are accounted for as a single transaction that establishes the formation of a joint venture, the formation date is the measurement date for all arrangements that form part of the single formation transaction.

Disclosures

A joint venture shall disclose information that enables users to understand the nature and financial effect of the joint venture in the period in which the formation date occurs.

In the period of formation, a joint venture shall disclose (1) the formation date, (2) a description of its purpose, (3) the fair value of the joint venture as a whole at its formation date, (4) a description of the assets and liabilities recognized at the formation date, (5) the face of the financial statements or the disclosures in the notes to the financial statements should include amounts recognized for each major class of assets and liabilities and (6) a qualitative description of factors that make up any goodwill recognized.

Effective dates of ASU 2023-05

Effective date

All joint venture formations

Annual and interim periods — formation date on or after

January 1, 2025

Early adoption is permitted in any interim or annual period as long as financial statements have not yet been issued (or made available for issuance).

The update can be applied prospectively or retrospectively.

Retrospective application is available if sufficient information is available.

ASU 2023-06 — Disclosure Improvements

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative

ASU 2023-06 amends the disclosure requirements related to various topics within FASB’s Codification for SEC paragraphs pursuant to the SEC’s Release No. 33-10532, Disclosure Update and Simplification, issued August 2018. The board incorporated 14 of the 27 disclosures referred by the SEC into the codification.

The amendments are effective for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of and for purposes of issuing securities that are not subject to contractual restrictions on transfer. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption permitted. For all other entities, the amendments will be effective two years later.

The amendments in this update should be applied prospectively.

If by June 30, 2023, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the codification and will not become effective for any entity.

The following table summarizes the amendments to the codification:

Codification subtopic

Summary of amendments

230-10 Statement of Cash Flows — Overall

Requires an accounting policy disclosure in annual periods where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows.

250-10 Accounting Changes and Error Corrections — Overall

Requires that when there has been a change in the reporting entity, the entity must disclose any material prior period adjustment and the effect of the adjustment on retained earnings in interim financial statements.

260-10 Earnings Per Share — Overall

Requires disclosure of the methods used in the diluted earnings-per-share computation for each dilutive security and clarifies that certain disclosures should be made during interim periods. Amends illustrative guidance to illustrate the disclosure of the methods used in the diluted earnings-per-share computation.

270-10 Interim Reporting — Overall

Conforms to the amendments made to Topic 250.

440-10 Commitments — Overall

Requires disclosure of assets mortgaged, pledged or otherwise subject to lien and the obligations collateralized.

470-10 Debt — Overall

Requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted average interest rate on outstanding short-term borrowings. Entities that are not public business entities are not required to provide information about the weighted average interest rate.

505-10 Equity — Overall

Requires entities that issue preferred stock to disclose preference in involuntary liquidation if the liquidation preference is other than par or stated value.

815-10 Derivatives and Hedging — Overall

Adds cross-reference to disclosure requirements related to where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows in Topic 230.

860-30 Transfers and Servicing — Secured Borrowing and Collateral

Requires:

a. That accrued interest be included in the disclosure of liabilities incurred in securities borrowing or repurchase or resale transactions.

b. Separate presentation of the aggregate carrying amount of reverse repurchase agreements on the face of the balance sheet if that amount exceeds 10% of total assets.

c. Disclosure of the weighted-average interest rates of repurchase liabilities for public business entities.

d. Disclosure of amounts at risk with an individual counterparty if that amount exceeds more than 10% of the stockholder’s equity.

e. Disclosure for reverse repurchase agreements that exceed 10% of total assets on whether there are any provisions in a reverse repurchase agreement to ensure that the market value of the underlying assets remains sufficient to protect against counterparty default and, if so, the nature of those provisions.

932-235 Extractive Activities — Oil and Gas — Notes to Financial Statements

Requires that paragraphs 932-235-50-3 through 50-36 be applicable for each annual period presented in the financial statements.

946-20 Financial Services — Investment Companies — Investment Company Activities

Requires that investment companies disclose the components of capital on the balance sheet.

974-10 Real Estate — Real Estate Investment Trusts — Overall

Requires disclosure for annual reporting periods of the tax status of distributions per unit (for example, ordinary income, capital gain and return of capital) for a real estate investment trust.

ASU 2023-07 — Segment Reporting (Topic 280)

Improvements to Reportable Segment Disclosures

ASU 2023-07 applies to all public entities required to report segment information under Topic 280, Segment Reporting.

Public entities already must report a measure of a segment’s profit or loss for each reportable segment that the chief operating decision-maker (CODM) uses to assess segment performance and make decisions about resource allocation. The goal is to enhance the reportable segment disclosure requirements, providing investors with a better understanding of an entity’s overall performance and helping them assess the potential future cash flows.

The amendments in this update do not change or remove existing disclosure requirements.

Main requirements

Amendments in this update require a public entity to disclose, on an interim and annual basis, the following:

  • Significant segment expenses regularly provided to the CODM and included within each reported measure of segment profit or loss (this is the “significant expense principle”).
    • To apply the significant expense principle, an entity should first identify the segment-level expense information that is regularly provided to the CODM.
    • The entity should evaluate that information to identify those segment expenses that are included in each reported measure of a segment’s profit or loss.
    • The entity should then disclose those identified segment expense categories and amounts that are significant.
  • An amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.
  • All annual disclosures under FASB ASC 280 will be reported in the interim period regarding a reportable segment’s profit or loss and assets.
  • Clarification as to whether the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. One or more additional measures of segment profit or loss may be provided; however, at least one should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.
  • The title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in the assessment of segment performance and resource allocation decisions.

If a public entity only has one reportable segment, all the required disclosures in this ASU and existing disclosures within Topic 280 must be provided.

The disclosure examples in Topic 280 have been updated for the new requirements.

In applying the guidance to its disclosures, a public entity should evaluate segment expenses that are regularly provided to the CODM as well as a segment expense that is easily computable from information that is regularly provided to the CODM. This can include information regularly provided to the CODM that is expressed in a form other than actual amounts, such as a ratio or an expense as a percentage of revenue.

The FASB added paragraphs 280-10-55-15A through 15B to provide additional information on whether segment expense amounts can be easily computed.

Transition

The update should be applied retrospectively to all prior periods presented in the financial statements. Upon transition, segment expense categories and amounts disclosed in prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.

Effective dates of ASU 2023-07

Effective date

All public entities

Annual periods — fiscal years beginning after

December 15, 2023

Interim periods — fiscal years beginning after

December 15, 2024

Early adoption is permitted.

ASU 2023-08 — Intangibles — Goodwill and Other — Crypto Assets (Subtopic 350-60)

Accounting for and Disclosure of Crypto Assets

A long-awaited amendment from the FASB, ASU 2023-08, takes on the accounting and disclosure requirements for certain crypto assets.

This update impacts all entities that have or anticipate having investments in crypto or other digital assets. It does not impact entities already accounting for crypto assets within the scope of the investment company guidance in ASC 946 or certain broker-dealer types.

Previously, crypto assets were accounted for as indefinite-lived intangible assets. They were tested for impairment, and any impairment was recognized as an impairment loss and reduced the asset’s carrying amount. Subsequent increases in the carrying amount of the crypto assets could not be recognized, as the reversal of an impairment loss was prohibited.

Scope

In order to fall within the scope of this guidance, crypto and other digital assets must meet all of the following criteria:

  • Meet the definition of intangible assets as defined in the codification.
  • Do not provide the asset holder with enforceable rights to or claims on underlying goods, services or other assets.
  • Are created or reside on a distributed ledger based on blockchain or similar technology
  • Are secured through cryptography.
  • Are fungible (note that non-fungible tokens, or NFTs, will be excluded from the scope).
  • Are not created or issued by the reported entity or its related parties.

Measurement

Assets within scope must be subsequently measured at fair value under ASC 820. Changes are to be recognized in net income each reporting period.

Presentation

For financial statement presentation, crypto assets should be reported as follows:

  • Balance sheet or statement of financial position: Crypto assets measured at fair value must be presented separately from other intangible assets.
  • Income statement or statement of activities: Changes from the remeasurement of crypto assets must be presented separately from changes in the carrying amounts of other intangible assets.
  • Cash flow: Cash receipts arising from crypto assets that are received as noncash consideration in the ordinary course of business or as a contribution (in the case of a not-for-profit entity) and are converted nearly immediately into cash. A not-for-profit that immediately liquidates crypto assets received with donor restrictions for long-term or capital use should classify the transaction as a cash flow from financing.

Disclosure

In annual and interim reporting periods, the following information must be disclosed:

  1. For each significant crypto asset holding, the name, cost basis, fair value and number of units.
  2. The aggregate fair values and costs basis of the crypto assets that are not individually significant.
  3. If crypto assets are subject to contractual sale restrictions, disclose the fair value of those crypto assets, the nature and remaining duration of the restriction(s) and the circumstances that could cause the restriction(s) to lapse.

    The following information must be disclosed only annually:

  4. An aggregate rollforward of activity in the reporting period for crypto asset holdings, including additions, a description of the activities that resulted in the additions, dispositions, gains and losses.
  5. Dispositions of crypto assets in the reporting period require disclosure of the difference between the disposal price and the costs basis, with a description of the activities that resulted in the dispositions.
  6. If gains and losses are not presented separately, the income statement or statement of activities line in which those gains and losses are recognized.
  7. The method for determining the cost basis of the crypto asset.

Transition

A cumulative-effect adjustment is to be made to the opening balance of retained earnings or other appropriate components of equity or net assets as of the beginning of the annual reporting period in which an entity adopts the amendments.

Effective dates of ASU 2023-08 by entity type

Effective date

All entities

Annual and interim periods* — fiscal years beginning after

December 15, 2024

Early adoption is permitted for all entities in any interim period.

*If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

ASU 2023-09 — Income Taxes (Topic 740)

Improvements to Income Tax Disclosures

The FASB issued its last ASU, ASU 2023-09, in December 2023 to enhance existing income tax disclosures and provide users of the financial statements with the ability to better assess an entity’s related tax risks. It also helps users assess how tax planning and operational opportunities affect its tax rate and prospects for future cash flows.

The guidance applies to all entities that are subject to Topic 740, Income Taxes. Some disclosures in the update are not required for entities other than public business entities (PBEs).

The following table includes a summary of the income tax disclosure changes. The FASB provides example disclosures in the update.

Rate reconciliation

 

Tabular reconciliation between the expected income tax and reported income tax from continuing operations, broken out into specific categories.1

 

Separate disclosure for certain reconciling items listed that meet or exceed 5% of the expected tax .2

 

Reconciliation is in both percentage and reporting currency amounts.

 

Qualitative description of states and local jurisdictions that make up the majority (greater than 50%) of the effect of the state and local income tax category.

 

If not otherwise evident, an explanation of the individual reconciling items such as the nature, effect, underlying causes of reconciling items, and judgment used in categorization.

 

PBEs only

Qualitatively disclose the nature and effect of specific categories of reconciling items, as well as individual jurisdictions, that resulted in a significant difference between the statutory tax rate and effective tax rate.

 

All other entities

Income taxes paid — Statement of Cash Flows-Related Disclosures

Amount of income taxes paid (net of refunds received) disaggregated by federal (national), state and foreign taxes.

 

Amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received).

 

Both

Other disclosures

Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.

 

Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign.

 

No longer required to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits balance in the next 12 months or make a statement that an estimate of the range cannot be made.

 

Remove the requirement to disclose the cumulative amount of each temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

 

Both

Rate reconciliation additional notes:

 

  1. Specific categories required to be disclosed by PBEs:
  • 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

For the purpose of categorizing reconciling items, the foreign tax effects category should reflect income taxes imposed by foreign jurisdictions. The state and local income tax category and all other remaining categories listed reflect income taxes imposed by the jurisdiction (country) of domicile.

 

  1. Reconciling items required to be disclosed by PBEs that meet or exceed 5% of the expected tax:
  • Disaggregation by nature if is within the effect of cross-border tax laws, tax credits, or nontaxable or nondeductible items categories.
  • Disaggregation by jurisdiction (country) and nature if it is within the foreign tax effects category. Exception for reconciling items related to changes in unrecognized tax benefits.

If the reconciling item does not fall within any of the specific categories required to be disclosed, it is required to be disaggregated by nature.

 

Reconciling items must be presented on a gross basis with two exceptions:

  • Unrecognized tax benefits and the related tax positions and tax effects of certain cross-border tax laws and the related tax credits may be presented on a net basis.
  • Changes in unrecognized tax benefits may be disclosed on an aggregated basis for all jurisdictions.

 

Transition

The update should be applied on a prospective basis. Retrospective application is also permitted.

Effective dates of ASU 2023-09 by entity type

Effective date

Public business entities

All other entities

Annual periods — fiscal years beginning after

December 15, 2024

December 15, 2025

Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.

How Wipfli can help

Wipfli is ready to help you navigate your biggest questions and challenges about the 2023 accounting standards updates. Our dedicated audit and accounting team can provide you with the guidance you need to stay in compliance and build confidence with your customers or clients. Contact us to learn more about how our team can help create value for your business.

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Author(s)

Melanie Ott, CPA
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