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FASB raises tax transparency bar

Sept. 5, 2023

The third time turned out to be the charm for the FASB’s standards update that will require companies to disclose more tax information.

When the Financial Accounting Standards Board recently put back on its agenda a controversial proposal requiring companies to report vastly more information on the taxes they pay, it wasn’t clear that the U.S. standard setter’s new initiative would get the green light.

During the comment period, the FASB drew critical feedback from a wide range of stakeholders, including big financial players such as the New York City-based credit card giant American Express, which raised concerns about the disclosures’ frequency. It also heard from 15 Republican House members who urged FASB in a letter to withdraw the proposal, asserting it could “harm U.S. multinationals because their foreign competitors will have access to a greater level of detail on U.S. companies’ operations and tax strategies.”

But — after failing in two previous attempts to get new tax accounting standards across the finish line — the third time turned out to be the charm for the FASB’s latest tax update project: It was unanimously approved in a 7-0 vote at a meeting last Wednesday.

“This project to me has been focused…on providing investors who make capital allocation decisions with useful information to understand a complex area, and that’s it,” FASB Board Chair Richard Jones said at the Wednesday meeting before casting his vote.

The information is going to be used by investors in two ways, he said, first as information that can help them determine what tax rate makes sense for the company and also as data that can be used to challenge companies. At the same time, while acknowledging that it’s an investor-focused project, Jones said that the board carefully reviewed all the feedback it got from all stakeholders to fashion a reasonable new standard.

We sought “to make sure we had something operational by being mindful of the cost,” Jones said. “I think we have the right balance here.”

The approval comes as some close watchers of FASB believed the recent rise in corporate environmental, social and governance initiatives might add the tailwind needed for the GAAP standards update to sail through to finalization.

As passed, the new standards will require companies to disclose income taxes paid on a disaggregated basis and to identify jurisdictions — such as a country or state — that receive more than 5% of its total tax payments, as CFO Dive previously reported.

Under current rules, companies aren’t required to break out their tax and profit information by country but must report the total amount of cash taxes they pay at least once a year, The Wall Street Journal reported.

The new rules will be effective for public companies for fiscal years beginning after Dec. 15, 2024, and for private companies and other companies beginning after Dec. 15, 2025.

Brett Weaver, a partner and ESG tax leader with KPMG, said the FASB vote effectively ushers in a new era for corporate tax reporting.

“The idea of significantly more disaggregation around tax disclosures is a done deal,” Weaver told CFO Dive. “I see this as another chapter in the overall story of greater transparency around business and particularly around tax.”

[CFO Dive]

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