ACCT 635 Week 5 Discussion Board Forum 5 Example

Discussion Board Forum 5: Income Tax Disclosure Under ASU 2023-09

ACCT 635 Advanced Research for Financial Reporting, Discussion Board Forum 5

Thread by [Student Name]

The classmates are composites; Target's figures come from its filed 10-K, and the standard, studies and Bible passage cited are real.

For years, investors complained that the income tax footnote told them less than it seemed to. Hanlon (2003) explained why: differences in consolidation rules, the treatment of stock options and the aggregated form of tax disclosures made it very hard to infer a company's taxable income or the taxes it actually paid from its financial statements. A company could report a familiar effective tax rate while the drivers behind it, state taxes, foreign operations, credits, uncertain positions, stayed buried in an "other" line.

ASU 2023-09 addresses that directly. Public companies must now present the rate reconciliation in both dollars and percentages using specified categories, including state and local taxes, foreign tax effects, tax credits and changes in unrecognized tax benefits, and must separately disclose any reconciling item equal to at least 5 percent of the tax computed at the statutory rate. They must also disaggregate income taxes paid among federal, state and foreign jurisdictions (Financial Accounting Standards Board [FASB], 2023). The update applied to annual periods beginning after December 15, 2024.

Target's fiscal 2025 report, for the year that closed on January 31, 2026, is its first under the new rules. Pretax income of $4,767 million produced a statutory charge of $1,001 million at 21 percent. State and local taxes added $168 million, 3.5 percentage points, and tax credits reduced the charge by $77 million, 1.6 points, leaving an effective rate of 22.3 percent and tax expense of $1,062 million. Target paid $1,091 million in income taxes during the year, of which $781 million went to the federal government and $39 million to foreign jurisdictions (Target Corporation, 2026). For the first time, a reader can see in dollars where a retailer's tax rate comes from and where its tax cash goes.

That detail serves the conceptual framework's goals. Wolk et al. (2017) stress relevance to users' predictions, and a reconciliation in dollars by category lets an analyst model how a change in state tax rates or in credits would affect future tax payments. Faithful representation gains as well, because an amount in dollars cannot hide behind rounding in the way a tenth of a percentage point can, and because the 5 percent threshold forces large items into the open instead of into a residual line. The cost is real but modest for a company that already prepares these figures internally for its tax returns.

Scripture urges people to provide things honest in the sight of all (English Standard Version Bible, 2001/2016, Romans 12:17). Clearer tax reporting is one modest way corporations do that.

Reply to Marcus

Marcus, you argued that ASU 2023-09 adds pages without adding insight, since most large companies' effective rates sit close to the statutory rate anyway. Target's numbers partly support your point: its effective rate of 22.3 percent is only slightly above 21 percent (Target Corporation, 2026). But the new format shows that a near-statutory rate can conceal offsetting items. State taxes added 3.5 points and credits subtracted 1.6, and an investor would want to know both, because they respond to different events. A change in state apportionment rules and a change in federal credits could move Target's rate in opposite directions, and the old footnote often netted such items or buried them in percentages without amounts.

Research has long suggested that aggregated tax disclosure left users unable to answer basic questions. Hanlon (2003) showed how difficult it is to back out taxable income from financial statements, and the new categories are a partial response to that problem. The jurisdictional breakdown of taxes paid also helps users judge exposure to policy changes in particular places.

I agree with you on one point: for companies with simple tax profiles, the added disclosure may be more compliance than insight, and the FASB acknowledged cost as a constraint. But when a company's yearly income tax bill runs past $1 billion, I think the detail earns its space. Would your view change for multinationals with large foreign operations, where the dispersion across jurisdictions is wider and the rate reconciliation can run to a dozen lines?

Reply to Leah

Leah, you asked why a company's tax expense and its income taxes paid differ, and whether the new disclosures help explain the gap. Target's last three 10-K years show why the question matters. For fiscal 2025 the two sat close together, $1,062 million booked against $1,091 million paid, and fiscal 2024 showed $1,170 million booked and $1,055 million paid. Fiscal 2023 is the outlier: $1,159 million of expense against just $374 million of cash taxes (Target Corporation, 2026). Expense follows accrual accounting, including deferred taxes and the timing of estimated payments, while cash paid follows when payments and refunds actually occur.

The filing reports these amounts without requiring a reader to guess, and the notes are where any explanation of an unusual year belongs; I would not speculate beyond what Target states. What the new standard adds is the jurisdictional split of cash paid, which lets a reader see whether the gap between expense and payments is federal, state or foreign (FASB, 2023).

That matters theoretically. Hanlon (2003) argued that financial statements make it hard to infer actual tax payments, and a three-year comparison shows how large the difference can be in a single year. An analyst predicting future cash flows needs both numbers, and one who used expense alone would have overstated fiscal 2023's tax outflow by nearly $800 million. I would suggest adding the cash taxes series to your research paper, since it shows the practical value of the disclosure better than the rate alone. Does your company show a similar swing, and if so, do its notes explain it?

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Financial Accounting Standards Board. (2023). Accounting standards update No. 2023-09: Income taxes (Topic 740): Improvements to income tax disclosures.

Hanlon, M. (2003). What can we infer about a firm's taxable income from its financial statements? National Tax Journal, 56(4), 831-863. https://doi.org/10.17310/ntj.2003.4.07

Target Corporation. (2026). Form 10-K: 2025 annual report. U.S. Securities and Exchange Commission.

Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2017). Accounting theory: Conceptual issues in a political and economic environment (9th ed.). SAGE.