FASB Renews Call for Deeper Disclosures on Income Taxes

Horseshoe on a barn wall as a good luck charm

Is the third time really a charm? That’s the hot question floating around the offices of the Financial Accounting Standards Board in Norwalk, Connecticut, as the group once again pushes for expanding disclosure of corporate income taxes.

The FASB has issued similar calls for more disclosure in 2016 and 2019. The latest effort started in March with a stated objective to “improve the transparency and decision usefulness of income tax disclosures” and “better meet the information needs of financial statement users in making capital allocation decisions.” While companies already make public their income taxes paid once a year, the FASB is looking for even more detailed information.

At a meeting last month, the board made a series of calls about how to proceed with its new proposal. First, it is proposing that companies disclose the amounts of income taxes paid broken up on the federal, state, and foreign levels. That includes disaggregating the amounts by jurisdiction in cases with a threshold of 5% of total income taxes paid. On this point, FASB would seem to have the backing of SEC Chair Gary Gensler. At a December 8th meeting with the Investor Advisory Committee, Gensler noted approvingly that “investors have expressed an interest in greater details, sometimes called disaggregation, with regard to income tax information.”

Additionally, FASB is looking for a deeper dive into companies’ actual tax rates. That would require providing reconciling information based on metrics such as state and local income tax, net of the federal income tax effect; the effect of cross-border tax laws; and tax credits. Moreover, it is proposing that companies disclose key reconciling items related to issues such as foreign tax effects. In cases of “reconciling items that cause significant year-to-date changes of the effective tax rate from the prior annual reporting period,” the board is asking for qualitative disclosures about the items.

The FASB’s actual proposal should see the light of day in the first quarter of 2023, with a 75-day comment period to follow. While Gensler seems to approve the proposal, it’s perhaps not surprising that business interests are already pushing back against it, just as they did with prior iterations. A Wall Street Journal article on the proposal documented some prominent corporations’ objections. As an example, Verizon Communications effectively said companies already disclose enough about their taxes. Drugmaker Pfizer Inc. warned that more tax disclosures would only muddy the waters for investors. (Rule of thumb: When people argue that more transparency would make something too hard for the uninitiated to understand, it usually means they just don’t want to share that information.)

Interestingly, the FASB has already attempted to address the issue of information overload through the latest version of the proposal. Corporate shareholders supposedly asked the board to revive the income tax project with a shift in focus toward investors’ concerns. As a result, the architects of the proposal dropped requirements from the 2019 version that would have forced companies to disclose even more extensive information.

That’s still not good enough for the Pfizers of the world, apparently. It seems fair to ask, then, if the FASB could do anything short of dropping the proposal altogether to satisfy corporate America.

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