Changes in GAAP income tax reporting could impact STAT reporting

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At the end of 2023, FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, to enhance income tax disclosure for investors by providing more detailed information regarding the effective tax rate reconciliation and income taxes paid. The new requirements apply to all entities that are subject to income tax. The effective dates of these changes will differ for publicly traded or privately owned companies. Public entities must incorporate these changes into their financial reporting for annual periods beginning after December 15, 2024. For all other entities, the effective date will be for annual reports beginning after December 15, 2025.  Most insurance companies with calendar year-end reporting should expect the changes to affect their December 31, 2026 annual statements.

Rate Reconciliation Disclosure

ASU 2023-9 adds additional reporting for public business entities for rate reconciliation, including disaggregation of items that give rise to differences between statutory tax rate and effective tax rate. In addition, these items will need to be reported in both percentages and currency amounts. The following eight categories will be required to be disclosed:

1. State and local income tax, net of federal (national) income tax effect
2. Foreign tax effects
3. Effect of changes in tax laws or rates enacted in the current period.
4. Effect of cross-border tax laws
5. Tax credits.
6. Changes in valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits.

Further disaggregation should be provided if any categories exceed the quantitative threshold of 5%. This means if a company with a statutory rate of 21% has rate reconciliation items that are greater than 1.05%, these items would need to be separately disclosed.

Currently, SSAP 101 requires disclosure of either the percentage of rate reconciliation or the tax-affected amounts. The adoption of ASU 2023-09 could change this requirement for insurance companies to include both the percentage and the amounts, as the private/public entity distinction does not exist in statutory accounting. On March 16, 2024, the Statutory Accounting Principle (E) Working Group (SAPWG) proposed revisions to SSAP 101 based on ASU 2023-09. One of the revisions would be to add a paragraph describing the above categories as required disclosures. Most insurance companies are not expected to have significant items disclosed under category 1 as insurance companies are not subject to state income tax in most of the state jurisdictions.

Disclosure of Income Taxes Paid

Another major area where we might see more changes in statutory reporting due to the adoption of ASU 2023-09 is the income taxes paid disclosure. SAPWG discussed the following changes:

• Disclose income tax expense (benefit) and income taxes paid, net of refunds received, by federal, state, and foreign jurisdictions
• Disclose the amount of income taxes paid (net of refunds received) to each jurisdiction in which total income taxes paid is equal to or greater than 5% of total income taxes paid in all jurisdictions.

Other Disclosures

Additional statutory disclosures that are anticipated to follow GAAP reporting requirements are:

• Separately disclosure of pre-tax income (loss) for domestic and foreign activities
• Removal of the cumulative amount of each type of temporary tax difference when a deferred tax liability is not recognized for undistributed foreign earnings
  • The rationale for removing this reporting under GAAP also applies to STAT reporting. The Tax Cuts and Jobs Act reduced the relevance of the existing disclosure of the cumulative temporary differences related to foreign subsidiaries when a deferred tax liability is not recognized.