How ASU 2023-09 Could Impact Your Private Company’s 2026 Income Tax Disclosures

Due to the complexity of income tax laws and calculations, financial statement users often struggle to glean practical insight from the income tax footnote of a company’s financial statements. Recognizing this common frustration, in 2023 the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2023-09, enhancing income tax presentation and disclosure requirements for financial statements.

The goal of the changes outlined below is to increase transparency, provide more comprehensive tax-related information to stakeholders and align reporting practices with global standards. And for private companies, the deadline to implement these changes is imminent — beginning with financial statements for the 2026 year. Now is the time to ensure you understand ASU 2023-09’s potential impact on your business.

When Does ASU 2023-09 Become Effective?

ASU 2023-09 goes into effect for private companies for annual periods beginning after December 15, 2025, and a year earlier for public entities. If you have a private company and are planning on issuing financial statements for the 2026 fiscal year, your financial statements will need to be compliant.

What Will Change in ASU 2023-09?

The primary provisions of ASU 2023-09 for private companies include the following:

1. Expanded Reconciliation of Effective Tax Rate
   With a flat federal tax rate of 21%, it would seem reasonable for a financial statement reader to expect federal tax expense to be 21% of the financial statement pre-tax income. This is most often not the case, due to various reconciling items reducing, or increasing, the effective tax rate.
   
   ASU 2023-09 requires private companies to qualitatively explain the nature and effect of all significant categories of reconciling items. The categories to be disclosed, as applicable, include the following:
   • State and local taxes
   • 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
   
   Including this information qualitatively allows the reader to further understand why the effective tax rate isn’t as simple as multiplying the financial statement pre-tax income by 21%.



2. Disaggregation of Information
   The ASU requires companies to break down their income tax expense and taxes paid from continuing operations by jurisdiction, if those expenses and taxes meet certain quantitative thresholds. The breakdown will distinguish between domestic and foreign operations, as well as state and federal taxes. This level of detail will help financial statement users assess geographic tax risks and exposures.




3. Removal of Prior Required Disclosures
   Under this ASU, it is no longer required to disclose the following:

   • The nature and estimation of future changes in unrecognized tax benefits
   • The cumulative amount of temporary differences, by type, when a deferred tax liability is not recognized because of exceptions related to subsidiaries and corporate joint ventures

While the focus in this article is on private companies, it is worth noting ASU 2023-09 contains additional/expanded requirements for public companies, albeit with the shared goal of transparency and improved financial statement user experience.

How Does ASU 2023-09 Affect Your Private Company, and What Are Your Next Steps?

If your company already maintains the above information, particularly if you have an enterprise resource planning (ERP) system with the capability to disaggregate information by jurisdiction for income tax compliance purposes, you might experience a minimal impact from ASU 2023-09.

If you do not have this information readily available, preparing for compliance with ASU 2023-09 may involve revisiting tax reporting processes, investing in data collection systems, and collaborating closely with tax advisers and auditors. The sooner you implement best practices, such as detailed documentation and proper document retention, the less difficulty your company will have implementing this update.

The new income tax disclosure requirements represent a step toward greater transparency and consistency in financial reporting. By understanding the changes and preparing proactively, businesses can not only achieve compliance but also enhance stakeholder trust and decision making. Reach out to your tax and audit team to discuss the impact and specific next steps your organization may need to take early this year.

Contact Ryan Hochberg or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.