Although it is a mandatory part of the notes to the financial statements, International Financial Reporting Standards (IFRS) do not specify the level of detail required in a tax reconciliation. In December 2023, the Financial Accounting Standards Board (FASB) issued new income tax disclosure requirements for US GAAP, in addition to modifying and eliminating certain existing requirements. Under the new guidance entities will be required to provide greater disaggregation of information in the rate reconciliation. Could these new US GAAP rules also affect income tax disclosures under IFRS?

Background

IAS 12 prescribes the recognition, measurement, and disclosure of income taxes under IFRS. Among other things this standard specifies the disclosures that a group must make in the notes to its financial statements in respect of income taxes. In accordance with IAS 12.81(c), an integral part of the required disclosure is the tax (rate) reconciliation. In such a reconciliation, a group must explain the differences between the expected and actual tax expense. The expected tax expense is calculated by multiplying the IFRS profit before tax by the expected tax rate. The actual tax expense is the current and deferred income tax recognised in the period. Preparing a tax reconciliation is straightforward in theory but can be challenging in practice.

IFRS do not specify the level of detail required by groups to explain the reasons for the difference between actual and expected tax expense. Nor does IFRS specify any mandatory items for the reconciliation. IAS 12.80 provides some guidance by giving examples of current and deferred tax items that may be included in tax expense. IAS 12.84 elaborates on the purpose of the disclosures required under IAS 12.81(c), i.e., to “[…] enable users of financial statements to understand whether the relationship between tax expense (income) and accounting profit is unusual and to understand the significant factors that could affect that relationship in the future.” IAS 12.84 includes four example factors: (i) revenue that is exempt from taxation, (ii) expenses that are not deductible in determining taxable profit (tax loss), (iii) the effect of tax losses and (iv) the effect of foreign tax rates.

As a result of this lack of guidance, the level of detail in groups' tax reconciliations is very heterogeneous, which is contrary to IFRS’s goal of achieving comparability of financial statements between different groups. Deloitte undertook a benchmarking of more than 90 income tax disclosures and found that, depending on the group, the reconciliation may contain between four and twelve items. We also noted that in some cases the categories chosen by the groups are not very meaningful without further explanation.

New FASB Requirements

Until recently, US GAAP, like IFRS, did not specify how detailed a tax reconciliation should be. Notably, the SEC regulations already required separate disclosure where the amount of a tax effect exceeds 5%. In December 2023 the Financial Accounting Standards Board (FASB) issued revised guidance in the Accounting Standards Update (ASU) 2023-09 (link). As a rationale for these amendments the FASB cite investor requests to receive enhanced 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 tax flows.”

Public business entities are required to apply the guidance in the ASU for annual periods beginning after 15 December 2024 (i.e., 2025 for calendar year entities); all other entities have an additional year to comply. Specifically, entities are required to disclose a tabular reconciliation using both percentages and reporting currency amounts in accordance with the following requirements:

1. Effects from state and local income taxes;
2. Effects from foreign taxes;
3. Effects of changes in tax laws / rates enacted in the current period;
4. Effects of cross-border tax laws (e.g., GILTI, BEAT);
5. Effects from tax credits;
6. Effects from changes in valuation allowances;
7. Effects from non-taxable or non-deductible items;
8. Effects from changes in unrecognised tax benefits.

Categories 2, 4, 5 and 7 are to be further disaggregated based on a quantitative threshold of 5% "of the amount computed by multiplying profit (or loss) from continuing operations before income taxes by the applicable statutory federal (state) income tax rate". If a reconciling item does not fall into one of the eight categories but meets the requirements for disaggregation based on the 5% threshold, it is required to be disaggregated by nature. These amendments will be included in ASC 740-10-50-12A.

New Global Standard?

Even though the new US GAAP rules are not binding on IFRS users, the FASB is creating a de facto global minimum standard for tax reconciliations with its requirements. This could lead investors to expect this or a similar minimum standard from IFRS users as well, although this is not foreseen in the IFRS regulations. This concerns both qualitative aspects (categories) and quantitative aspects (materiality threshold of 5%).

This recent development can be used as an opportunity to review the existing tax reconciliation with regard to the 2025 financial statements and adjust it if necessary. It is to be expected that US GAAP will thus create a certain level of expectation among investors in IFRS groups.

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