FRC publishes thematic review on deferred tax assets

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23 Sep, 2022

The Financial Reporting Council (FRC) has published its thematic review of deferred tax assets.

The review, which follows an earlier 2016 thematic, was prompted by the number of companies recognising material deferred tax assets relating to tax losses stemming from COVID-19.

For a sample of 20 companies, the review considered:

  • the basis of recognition of deferred tax (i.e. deferred tax assets should only be recognised to the extent their recoverability is probable based on the availability of future taxable profits);
  • the related disclosures under IAS 12 Income Taxes;
  • whether the evidence supporting the recognition of deferred tax assets for losses appeared to be sufficiently robust; and
  • the consistency of the deferred tax disclosures against the context of the annual report and accounts as a whole.

The FRC did not identify any obvious issues with over-recognition of deferred tax assets, although it noted in some cases it was difficult to make a full assessment due to the lack of informative disclosure.

Whilst the FRC did identify instances of good practice across most individual aspects of deferred tax asset disclosure, it does highlight that there is scope for improvement.  The FRC expects companies to consider the findings in the thematic when drafting their forthcoming annual reports and accounts.  Specifically the FRC expects companies to:

  • Disclose company-specific information about the nature of convincing evidence supporting the recognition of deferred tax assets when there is a recent history of losses.
  • Base forecasts of future taxable profit on assumptions that are consistent with other forecasts used in the preparation of the annual report and accounts (subject to some specific differences).
  • Reassess the level of recognition of deferred tax assets when there are material changes to the deferred tax liabilities in the same taxable entity and tax jurisdiction.
  • Disclose company-specific information about deferred tax judgements and estimates, including relevant sensitivities and/or the range of possible outcomes in the next 12 months.
  • Explain the extent to which climate change risks have been reflected in deferred tax judgements and estimates, consistent with the degree of emphasis placed on those risks in the narrative reporting.
  • Provide disaggregated information about material components of the tax expense and deferred tax balances.
  • Provide transparent and informative tax disclosures that are consistent across the annual report and accounts.

To encourage improvement in the general quality of company disclosures, the review includes examples of good practice where companies have provided informative, transparent disclosures in relation to deferred tax assets.

A press release and the full thematic are available on the FRC website.

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