Winter 2025

There’s an interesting phenomenon among practitioners when it comes to U.S. generally accepted accounting principles (GAAP) and special purpose framework (SPF) financial reporting. Practitioners who limit their A&A practice to tax-basis SPF financial reporting tend to ignore what comes out of the Financial Accounting Standards Board (FASB), let alone guidance from the AICPA’s Auditing Standards Board.

Too often, the requirements of AU-C Section 800.11 are missed, specifically the requirement to include “informative disclosures similar to those required by GAAP, in the case of special purpose financial statements that contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP.” As a result, many may have failed to disclose aspects of revenue recognition, leases, commitments, or even subsequent events in tax-basis financial statements with disclosures, even though these matters typically occur with non-GAAP reporting entities. Effective in 2026 for private companies, there will be expanded disclosures for an entity’s income taxes, which will impact all income-tax-paying reporting entities, no matter the reporting framework.

With an eye on enhancing the transparency and usefulness of income tax disclosures for investors, lenders, and creditors, the FASB in December 2023 issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is expected to enhance existing income tax disclosures to “provide information to better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.” Taxes have gotten increasingly complex, and the concern has been that the current rate reconciliation table and other disclosures fail to provide enough details to evaluate income tax risks and opportunities. With tax policies seemingly being modified from election to election, understanding and assessing income tax information has become increasingly difficult. This happens, it is believed, by providing more detailed information, which we affectionately call disaggregation.

Implications for Nonpublic Companies

While a tabular rate reconciliation is not required for nonpublic entities, they must qualitatively disclose (generally via descriptive narrative) the nature and effect of the specific categories of reconciling items and individual jurisdictions. It must be sufficient to make any significant differences between the statutory and effective tax rates more understandable.

Public companies build into their table reconciliations quantitative reporting of categories for state and local income tax net of the federal income tax effect, foreign tax effects, changes in tax laws or rates enacted in the current period, tax credits, changes in valuation allowances, among others. Nonpublic entities need only to assess these many factors and provide users with qualitative disclosure of these reconciling items. However, if certain quantitative information is of greater importance to users, expanded disclosures might be appropriate.

Income Taxes Paid Disclosures

ASU 2023-09 requires all entities to annually disclose income taxes paid (net of refunds received), disaggregated by federal (national), state and local, and foreign jurisdictions, and further disaggregation of information on income taxes paid (net of refunds received) for an individual jurisdiction where the amount is equal to or exceeds a threshold of 5% of total income taxes paid (net of refunds received). An entity may identify a country, state, or local territory as an individual jurisdiction. While disaggregation by jurisdiction for each period presented is required, it does not require comparative information by jurisdiction for all years presented.

While disclosure of temporary differences and carryforward information remains a mainstay, other-than-public businesses need only disclose the types of significant temporary differences and carryforwards, but may omit disclosure of the tax effects of each. If not otherwise evident, an entity shall disclose the nature and effect of other significant matters affecting information comparability.

Income Statement Disclosures

Entities must annually disclose income or loss from continuing operations before income tax from domestic and foreign sources, and income tax expenses (or benefits) from continuing operations is similarly disaggregated by federal, state, and foreign sources. Pretax income or loss presented before or after intercompany eliminations appears to be an election that should be applied consistently.

Undistributed Earnings

ASU 2023-09 eliminates the requirement to disclose the amount of each type of temporary difference when a deferred tax liability is not recognized under an exception to recognition in ASC 740-30.

Observations

The objective of these requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature and magnitude of factors contributing to a difference between effective and statutory tax rates.

For special purpose framework financial statements that include disclosures, practitioners will be required to include, at a minimum, qualitative narrative income tax disclosures for those income-tax-paying reporting entities. ASU 2023-09 is effective for private companies for years beginning after Dec. 15, 2025. Quality management standards also kick in at the end of 2025, so a non-GAAP practice may need to begin gathering the requisite resources.

James J. Newhard, CPA, is a sole practitioner in Paoli and a CPE presenter, serves on numerous PICPA technical A&A and tax committees, is a member of the Pennsylvania CPA Journal Editorial Board, and serves on the AICPA Joint Trial Board committee. He can be reached at jim@jjncpa.com.

There’s an interesting phenomenon among practitioners when it comes to U.S. generally accepted accounting principles (GAAP) and special purpose framework (SPF) financial reporting. Practitioners who limit their A&A practice to tax-basis SPF financial reporting tend to ignore what comes out of the Financial Accounting Standards Board (FASB), let alone guidance from the AICPA’s Auditing Standards Board.

Too often, the requirements of AU-C Section 800.11 are missed, specifically the requirement to include “informative disclosures similar to those required by GAAP, in the case of special purpose financial statements that contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP.” As a result, many may have failed to disclose aspects of revenue recognition, leases, commitments, or even subsequent events in tax-basis financial statements with disclosures, even though these matters typically occur with non-GAAP reporting entities. Effective in 2026 for private companies, there will be expanded disclosures for an entity’s income taxes, which will impact all income-tax-paying reporting entities, no matter the reporting framework.

With an eye on enhancing the transparency and usefulness of income tax disclosures for investors, lenders, and creditors, the FASB in December 2023 issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is expected to enhance existing income tax disclosures to “provide information to better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.” Taxes have gotten increasingly complex, and the concern has been that the current rate reconciliation table and other disclosures fail to provide enough details to evaluate income tax risks and opportunities. With tax policies seemingly being modified from election to election, understanding and assessing income tax information has become increasingly difficult. This happens, it is believed, by providing more detailed information, which we affectionately call disaggregation.

Implications for Nonpublic Companies

While a tabular rate reconciliation is not required for nonpublic entities, they must qualitatively disclose (generally via descriptive narrative) the nature and effect of the specific categories of reconciling items and individual jurisdictions. It must be sufficient to make any significant differences between the statutory and effective tax rates more understandable.

Public companies build into their table reconciliations quantitative reporting of categories for state and local income tax net of the federal income tax effect, foreign tax effects, changes in tax laws or rates enacted in the current period, tax credits, changes in valuation allowances, among others. Nonpublic entities need only to assess these many factors and provide users with qualitative disclosure of these reconciling items. However, if certain quantitative information is of greater importance to users, expanded disclosures might be appropriate.

Income Taxes Paid Disclosures

ASU 2023-09 requires all entities to annually disclose income taxes paid (net of refunds received), disaggregated by federal (national), state and local, and foreign jurisdictions, and further disaggregation of information on income taxes paid (net of refunds received) for an individual jurisdiction where the amount is equal to or exceeds a threshold of 5% of total income taxes paid (net of refunds received). An entity may identify a country, state, or local territory as an individual jurisdiction. While disaggregation by jurisdiction for each period presented is required, it does not require comparative information by jurisdiction for all years presented.

While disclosure of temporary differences and carryforward information remains a mainstay, other-than-public businesses need only disclose the types of significant temporary differences and carryforwards, but may omit disclosure of the tax effects of each. If not otherwise evident, an entity shall disclose the nature and effect of other significant matters affecting information comparability.

Income Statement Disclosures

Entities must annually disclose income or loss from continuing operations before income tax from domestic and foreign sources, and income tax expenses (or benefits) from continuing operations is similarly disaggregated by federal, state, and foreign sources. Pretax income or loss presented before or after intercompany eliminations appears to be an election that should be applied consistently.

Undistributed Earnings

ASU 2023-09 eliminates the requirement to disclose the amount of each type of temporary difference when a deferred tax liability is not recognized under an exception to recognition in ASC 740-30.

Observations

The objective of these requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature and magnitude of factors contributing to a difference between effective and statutory tax rates.

For special purpose framework financial statements that include disclosures, practitioners will be required to include, at a minimum, qualitative narrative income tax disclosures for those income-tax-paying reporting entities. ASU 2023-09 is effective for private companies for years beginning after Dec. 15, 2025. Quality management standards also kick in at the end of 2025, so a non-GAAP practice may need to begin gathering the requisite resources.

James J. Newhard, CPA, is a sole practitioner in Paoli and a CPE presenter, serves on numerous PICPA technical A&A and tax committees, is a member of the Pennsylvania CPA Journal Editorial Board, and serves on the AICPA Joint Trial Board committee. He can be reached at jim@jjncpa.com.