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FRC publishes the results of its thematic review of tax disclosures

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31 Oct 2016

The Financial Reporting Council (FRC) has today published the results of its thematic review of tax reporting. Thematic review supplement the FRC’s Corporate Reporting Review (CRR) function’s monitoring of company reports and accounts for compliance with the Companies Act 2006, applicable accounting standards and other reporting requirements. The aim of these reviews is to identify examples of good practice reporting and areas where improvements can be made.

The FRC reviewed the tax disclosures of 33 FTSE companies, having informed them of this in December 2015.  The objective of the review was to “encourage more transparent reporting of the relationship between tax charges and accounting profit and factors that could affect that relationship in the future, in accordance with existing requirements”.

The key messages from the thematic review include:

  • There was evidence of improvements in the transparency of tax disclosures included in strategic reports. Those reports that demonstrated good practice provided more detail on material tax matters likely to be important to investors including discussion of important tax issues arising in the year, major tax risks facing the company and explanations of the reassessment of prior year tax estimates where these were significant and tax impacts of acquisitions.  There was also an increase in companies providing disclosures describing their general approach to tax reporting. 
  • Better reports discussed the effective tax rate including commentary on variances in the effective tax rate on the prior year, key factors influencing the effective tax rate and the expected future rate. This information provided greater visibility of the factors affecting the tax charge and its sustainability. 
  • There is scope for companies to articulate better how they account for tax uncertainties by explaining the bases for recognition and measurement. The FRC will continue to challenge companies who do not provide disclosures of the amount of uncertain tax provisions when these are subject to risk of material change in the following year.  Better disclosures covered when provision is recognised, how the provision is measured and the factors considered in determining the amount to be provided.
  • The FRC encourages companies to improve the usefulness of their disclosure of significant judgements and estimation uncertainties relating to tax. It asks that preparers consider which information about specific judgements and estimation uncertainties would be most useful to the user of the accounts.  Better disclosures would cover, for example, the nature of the assumption or uncertainty, a quantification of the carrying amount of the asset or liability subject to the uncertainty and would include sensitivity analysis or a range of possible outcomes to provide users with a better understanding of the issue. 

The press release and the full thematic review, Corporate Reporting Thematic Review – Tax Disclosures, are available on the FRC website.

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