Rate Reconciliation Examples ASU 2023-09

Background

In December of 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update was prompted by investors’ feedback, “indicating that the existing income tax disclosures should be enhanced 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”. The update largely focuses on providing increased detail in the income tax rate reconciliation along with some modifications to other disclosures. This article will specifically concentrate on the income tax rate reconciliation, offering applied examples of how current rate conciliations might change with the new update. For more insights into the content of  ASU 2023-09, see our article, “An Overview of ASU 2023-09 Improvements to Income Tax Disclosures”.

First, we will look at Microsoft’s rate reconciliation included in its 2023 10-K. We cannot assert that the numbers presented in the following rate reconciliations, as per ASU 2023-09 guidelines, accurately represent the company's current state. Instead, these figures were computed and categories were included as an illustration of what their rate reconciliation could resemble in the future.

Microsoft

Current Tax Rate Reconciliation

Tax Rate Reconciliation Following ASU 2023-09 Guidelines

Differences Between the Two Rate Reconciliations

A notable distinction evident between the two reconciliations is the necessity to report both percentages and amounts on the rate reconciliation.

Ireland and Puerto Rico are both broken out by Jurisdiction because they meet the 5% threshold. In Microsoft’s 10-K it states that “the decrease from the federal statutory rate in fiscal year 2023 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and disributing our products and services through our foreign regional operations center in Ireland.” The 10-K further mentions that the lower tax rates in Ireland and Puerto Rico affected both 2021 and 2020. For the sake of this example, we have included these two countries in the reconciliation. Additionally, Puerto Rico has another separate line item broken out because the impact of intangible property transfers meets the 5% threshold.

Several of Microsoft's current categories, as disclosed in their 2023 rate reconciliation, will be rearranged and incorporated into different sections of the rate reconciliation. While there will be some new figures to report, such as changes in unrecognized tax benefits, most of the necessary information is already evident in their 10-K.

AT&T

Now we will look at AT&T’s rate reconciliation included in its 2023 10-K.

Current Tax Rate Reconciliation

Tax Rate Reconciliation Following ASU 2023-09 Guidelines

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The main difference between AT&T’s current and updated rate reconciliation lies in the inclusion of percentage adjustments to the U.S. Federal Statutory Tax in the new version, as opposed to only amount adjustments.

The original reconciliation line items were also reorganized to align with the new prescribed categories. While some of these items, such as “State and local taxes” and “CARES Act federal NOL carryback,” fit seamlessly, others posed challenges in categorization. Upon reviewing AT&T’s 10-K, we discovered that the company’s primary foreign involvement is in Mexico. Although the reconciliation does not explicitly state the tax effects of doing business in Mexico, the “Tax on Foreign Investments” item may pertain to Mexican investments or possibly another jurisdiction. AT&T will need to provide further breakdowns for these items.

Two additional items necessitate further breakdowns to align with the new requirements. Firstly, the “Permanent Items and R&D Credit” should likely be divided. The “R&D Credit” portion will remain within this category, while the remaining amount might need relocation to a different category, depending on the grouping of permanent items. Secondly, the “Changes in Unrecognized Tax Benefits” will be extracted from its current location, likely within the “Other Adjustments” category.

Lastly, the remaining line items from the original rate reconciliation were categorized as “Nontaxable or Nondeductible Items,” based on the limited information available in the 10-K. AT&T should thoroughly review these items to ensure their accurate placement.

Conclusion

In summary, these examples aim to provide practical demonstrations of how ASU 2023-09 will be implemented going forward. The ASU mandates substantial alterations to the rate reconciliation, necessitating a more detailed breakdown. While certain companies have already disclosed much of this information, others will undergo significant transformations in their reporting practices.

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