FASB’s ASU 2023-09: Enhancing Transparency in Income Tax Disclosures

ARTICLE | September 10, 2025

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update introduces significant changes to how companies report income tax information in their financial statements. The goal of the standard is to provide investors and stakeholders with clearer insights into how income taxes affect a company’s financial performance and future cash flows.

Effective Dates and Purpose

ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, and for all other entities a year later. The update responds to stakeholder requests for greater transparency and consistency in income tax disclosures, particularly around the reconciliation of effective tax rates and the reporting of income taxes paid.

Detailed Reconciliation Requirements

One of the most notable changes is the requirement for public business entities to present a detailed reconciliation of their effective tax rate. This reconciliation must be shown in both percentages and dollar amounts and must include specific categories such as state and local income taxes, foreign tax effects, changes in tax laws, tax credits, valuation allowances, and unrecognized tax benefits. If any individual reconciling item meets or exceeds a 5% threshold of the statutory tax calculation, it must be further disaggregated by nature and jurisdiction.

Requirements for Non-Public Entities

While public business entities face the most extensive disclosure requirements, non-public entities are not exempt from change. These entities must still provide enhanced qualitative disclosures that explain the nature and impact of specific categories of reconciling items in their effective tax rate. Although they are not required to present the full tabular reconciliation, they must have access to the underlying quantitative data to support their qualitative disclosures. This means that even non-public entities may need to enhance their systems and processes to comply with the new standard.

Disclosure of Income Taxes Paid

In addition to the rate reconciliation, all entities are required to disclose income taxes paid, net of refunds, broken down by federal, state, and foreign jurisdictions. Jurisdictions that represent 5% or more of total income taxes paid must be disclosed individually. This requirement will likely prompt many companies to revisit their data collection and reporting processes to ensure they can provide the necessary level of detail.

Implementation Challenges

Implementing ASU 2023-09 may require significant changes to internal systems and controls. Companies with manual tax provision processes, multiple subsidiaries, or operations in numerous tax jurisdictions may face more complex challenges. These organizations will need to assess their current data systems, identify gaps, and develop solutions to ensure compliance. This could involve upgrading technology, enhancing data governance practices, and refining financial close procedures.

Materiality Considerations

Importantly, the FASB has clarified that materiality should be considered when determining whether specific disclosures are required. If a reconciling item is immaterial, even if it meets the quantitative threshold, it does not need to be disclosed. This guidance helps ensure that financial statements remain focused and relevant without becoming unnecessarily complex.

Preparation and Strategic Benefits

As the effective date approaches, companies should begin preparing now. Early adoption is permitted, and proactive planning will help ensure a smooth transition. The enhanced disclosures introduced by ASU 2023-09 are designed to improve transparency and consistency. These changes give investors a clearer view of how a company’s global operations, tax risks, and planning strategies affect its tax rate and future cash flows. By embracing these updates, organizations can meet compliance requirements while also strengthening the quality and usefulness of their financial reporting.