ASU 2023-09 Explained: FASB's New Income Tax Disclosure Rules
ASU 2023-09 is FASB's most significant overhaul of income tax disclosures under ASC 740 in decades. If your entity is subject to income taxes and reports under US GAAP, this standard changes what you disclose, how you present it, and the data you need to collect.
This article is the canonical reference for what the standard actually requires. For a side-by-side comparison with IAS 12, see ASU 2023-09 vs IAS 12 Income Tax Disclosures. For the full compliance and implementation guide, see ASU 2023-09 Income Tax Disclosures: 2026 Compliance Guide.
What Is ASU 2023-09?
ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," is a final standard issued by FASB in December 2023 that amends ASC Topic 740. It does not change how income taxes are recognized or measured. It changes only what entities must disclose.
The standard applies to all entities subject to income taxes under ASC 740: US-domiciled public companies, foreign private issuers reporting under US GAAP, private companies, and not-for-profit entities with taxable income.
Key takeaway: ASU 2023-09 is a disclosure-only amendment. Recognition and measurement under ASC 740 are unchanged. The compliance burden is in data collection and presentation, not in accounting judgments.
Why Did FASB Issue ASU 2023-09?
The short answer: investors asked for it, repeatedly.
FASB's project responded to feedback from its Investor Advisory Committee and broader stakeholders that existing ASC 740 disclosures were too opaque to assess tax risk or understand what drives an entity's effective tax rate. Investors wanted to:
- Understand exposure to changes in jurisdictional tax law
- Assess how income taxes affect cash flow forecasts and capital allocation
- Identify tax planning opportunities and risks in multinational structures
The existing rate reconciliation allowed companies to disclose either percentages or dollar amounts, and required disclosure only of "significant" reconciling items without defining that term precisely. In practice, many companies disclosed only percentages, which obscured the absolute magnitude of tax items. ASU 2023-09 closes that gap.
Who Does ASU 2023-09 Apply To?
The standard applies to all entities subject to ASC 740. However, the specific requirements differ significantly between public business entities (PBEs) and non-PBEs.
| Entity Type | Rate Reconciliation | Income Taxes Paid | Effective Date |
|---|---|---|---|
| Public business entity (PBE) | Tabular, both % and $ amounts, 8 prescribed categories | Disaggregated by federal/state/foreign + 5% jurisdiction threshold | Fiscal years beginning after Dec 15, 2024 |
| Non-PBE (private, nonprofit) | Qualitative description only (no tabular reconciliation required) | Disaggregated by federal/state/foreign + 5% jurisdiction threshold | Fiscal years beginning after Dec 15, 2025 |
Calendar-year PBEs first applied ASU 2023-09 in their fiscal year 2025 annual reports, filed in early 2026. Calendar-year non-PBEs first apply it in their fiscal year 2026 annual reports.
One nuance worth flagging: because ASU 2023-09 replaces the term "public entity" in ASC 740 with "public business entity" (using the Master Glossary definition), more entities may be subject to PBE-level requirements than were previously captured under the old "public entity" definition. Entities that issue publicly traded or publicly offered conduit debt with publicly available financial statements should verify their classification.
The Eight Required Rate Reconciliation Categories
For PBEs, ASU 2023-09 requires a tabular rate reconciliation presented in both percentages and reporting currency dollar amounts. The reconciliation must organize items into eight prescribed categories:
- State and local income tax, net of federal (national) income tax effect
- Foreign tax effects
- Effect of changes in tax laws or rates enacted in the current period
- Effect of cross-border tax laws (GILTI, FDII, BEAT, OECD Pillar Two top-up taxes)
- Tax credits
- Changes in valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits
Previously, ASC 740 required disclosure of "significant reconciling items" without specifying categories. Companies had wide latitude in how they labeled and grouped items. The eight-category structure removes that latitude and creates a standardized framework investors can compare across entities and periods.
The requirement to show both percentages and dollar amounts is new for many companies. Entities that previously disclosed only percentages must now also present the absolute dollar impact of each category.
How the 5% Disaggregation Threshold Works
Within each of the eight categories, any individual reconciling item whose absolute value equals or exceeds 5% of the product of pre-tax income and the applicable statutory federal (national) tax rate must be separately disclosed.
FASB chose the 5% threshold to align with the existing SEC Regulation S-X Rule 4-08(h)(2) requirement, which already applied to SEC registrants. As PwC notes, the threshold is applied on an absolute value basis, meaning both tax benefits and tax expenses that individually meet the threshold must be separately disclosed, even if they partially offset each other within a category.
A worked example makes this concrete:
- US-domiciled entity, 21% statutory federal rate
- Pre-tax income: $100 million
- Computed tax at statutory rate: $21 million
- 5% threshold: $1.05 million (5% x $21M)
- Any individual reconciling item with an absolute value of $1.05 million or more must be separately disclosed
For a US entity, this means any item that moves the effective tax rate by 1.05 percentage points or more triggers separate disclosure. For large multinationals with dozens of foreign jurisdictions and cross-border structures, this threshold will surface many items that were previously buried in aggregated categories.
Additional Disaggregation Rules Within Categories
The standard also specifies how items within certain categories must be further broken down when they meet the threshold:
- Items within foreign tax effects: disaggregated by jurisdiction (country) and by nature
- Items within cross-border tax laws, tax credits, or nontaxable/nondeductible items: disaggregated by nature
- Items that do not fall within any prescribed category: disaggregated by nature
The Deloitte Heads Up also notes that additional disaggregation may be required even below the 5% threshold if an item affects the historical trend line of a category or is related to a category that must be further disaggregated.
Income Taxes Paid Disclosures
This requirement applies to all entities, not just PBEs.
ASU 2023-09 requires annual disclosure of income taxes paid (net of refunds received), disaggregated into three buckets:
- Federal (national)
- State and local
- Foreign
Beyond that three-way split, any individual jurisdiction where income taxes paid equal or exceed 5% of total income taxes paid must be separately identified. This applies to countries, states, or local territories.
Two important mechanics to understand:
- This disclosure covers cash taxes paid, not income tax expense on the income statement. Cash taxes paid can differ significantly from book tax expense due to timing differences, estimated payments, and refunds.
- Income taxes on foreign earnings imposed by the jurisdiction of domicile (for example, US GILTI tax on a US parent's foreign subsidiaries) are included in the federal (national) amount for the jurisdiction of domicile, not in the foreign category. This allocation rule has significant practical implications for US multinationals with large GILTI exposures.
Additional Disclosures Required for All Entities
Beyond the rate reconciliation (PBEs only) and income taxes paid (all entities), ASU 2023-09 also requires all entities to disclose annually:
- Pre-tax income (or loss) from continuing operations, disaggregated between domestic and foreign
- Income tax expense (or benefit) from continuing operations, disaggregated by federal (national), state, and foreign
These income statement disaggregation requirements apply to every entity in scope, including private companies and nonprofits with taxable income.
What Non-PBEs Are (and Are Not) Required to Do
This is one of the most misunderstood aspects of the standard. Private companies and nonprofits are not required to provide the tabular rate reconciliation with the eight prescribed categories. That requirement is PBE-only.
Non-PBEs must instead provide a qualitative description of the nature and significant categories of reconciling items that cause differences between the statutory rate and the effective tax rate, including individual jurisdictions that result in a significant difference.
Non-PBEs are, however, subject to:
- The disaggregated income taxes paid disclosure (federal/state/foreign, plus the 5% jurisdiction threshold)
- The disaggregated pre-tax income and income tax expense disclosures
For calendar-year non-PBEs, these requirements are effective for fiscal year 2026 annual reports. If your organization is a private company or nonprofit currently in implementation, the data collection challenge for the income taxes paid disclosure is the most operationally intensive piece.
Non-US-Domiciled Entities: The Canton and Province Problem
Non-US-domiciled PBEs use the federal (national) income tax rate of their country of domicile as the starting point for the rate reconciliation. That part is consistent with existing SEC requirements.
The new wrinkle: the standard requires separate disclosure of state-and-local-like effects within the rate reconciliation, even for non-US entities. As PwC confirmed in October 2025:
"Companies domiciled outside the US will need to separately disclose the state and local effects in their jurisdiction of domicile separately in their rate reconciliation upon adoption of the ASU."
This is a meaningful change for companies domiciled in Switzerland (where cantonal taxes are a substantial portion of total tax), Canada (provincial taxes), and other jurisdictions where blending the federal and state-like rates into a single starting rate has been standard practice. Those blended-rate presentations are no longer compliant under ASU 2023-09.
Transition: Prospective vs. Retrospective
Prospective application is the default. Entities may elect retrospective application to all prior periods presented.
The choice matters more than it might appear:
- Prospective: Year one disclosures show only the current period under the new format. Prior-year comparatives remain in the old format. Simpler to implement, but creates a presentation break that investors may find confusing.
- Retrospective: Prior-year disclosures are restated to the new format, providing comparability. Requires rebuilding historical data to the eight-category structure, which is operationally demanding.
Early adoption is permitted for all entities. Some PBEs elected early adoption in their fiscal year 2024 annual reports, providing the first market practice benchmarks. The majority of PBEs adopted for fiscal year 2025 (the mandatory effective date).
What ASU 2023-09 Removes
The standard is not purely additive. FASB also eliminated certain disclosures it determined were no longer decision-useful, as part of its broader Disclosure Effectiveness initiative. Specifically, ASU 2023-09 removes the requirement to disclose the nature and estimated amount of each type of temporary difference for which a deferred tax liability has not been recognized (previously required under ASC 740-30). Certain other requirements related to uncertain tax positions were also eliminated.
FAQ
Does ASU 2023-09 change how income taxes are measured or recognized? No. It is a disclosure-only amendment. Recognition and measurement under ASC 740 are unchanged.
When is ASU 2023-09 effective for private companies? For non-PBEs, the standard is effective for fiscal years beginning after December 15, 2025. Calendar-year private companies first apply it in their fiscal year 2026 annual reports.
Do non-PBEs need to provide the tabular rate reconciliation? No. Non-PBEs must provide a qualitative description of significant reconciling items, but the eight-category tabular reconciliation with dollar amounts and percentages is a PBE-only requirement.
What does the 5% threshold mean in dollar terms for a US company? For a US-domiciled entity subject to the 21% statutory rate, the threshold equals 1.05% of pre-tax income. On $100 million of pre-tax income, any reconciling item with an absolute value of $1.05 million or more must be separately disclosed.
Where do OECD Pillar Two top-up taxes go in the rate reconciliation? Pillar Two top-up taxes fall within the "effect of cross-border tax laws" category (category 4), alongside GILTI, FDII, and BEAT. If the absolute value of Pillar Two amounts meets the 5% threshold, they must be separately disclosed within that category, disaggregated by nature.
Can we apply ASU 2023-09 retrospectively? Yes, retrospective application to prior periods presented is permitted but not required. The default is prospective. Retrospective application provides comparability but requires rebuilding historical disclosures to the new eight-category format.
Does ASU 2023-09 apply to foreign private issuers? It applies to any entity subject to ASC 740, which includes foreign private issuers that report under US GAAP. Foreign private issuers that report under IFRS are not in scope; for that comparison, see ASU 2023-09 vs IAS 12 Income Tax Disclosures.
For the full implementation guide covering the 5% threshold in practice, Pillar Two classification, SEC comment patterns, and data infrastructure, see ASU 2023-09 Income Tax Disclosures: 2026 Compliance Guide.
