The Financial Reporting Council (FRC) has released details of its thematic review of aspects of tax reporting in annual reports and accounts, which found companies need to articulate better how they account for tax uncertainties, particularly in the light of the expected introduction of new IFRS requirements in this area
In December 2015, the FRC wrote to 33 FTSE 350 companies informing them that the tax disclosures in their next annual report and accounts would be reviewed by its corporate reporting review (CRR) function on behalf of the conduct committee.
The objective of the review was to encourage more transparent reporting of the relationship between tax charges and accounting profit and the factors that could affect that relationship in the future, in accordance with existing requirements.
The regulator says it found evidence of improvements in the transparency of tax disclosures included in strategic reports and effective tax rate reconciliations. However, it stated: ‘It was disappointing that no FTSE 100 company subject to the review stood out as a role model in their reporting of tax.’
The review goes on to say: ‘There is, however, scope for companies to articulate better how they account for tax uncertainties by explaining the bases for recognition and measurement. We will continue to challenge companies who do not disclose the amount of uncertain tax provisions when these are subject to risk of material change in the following year. The audit of uncertain tax provisions is an area of particular focus of the FRC’s audit monitoring activities for 2016/2017.’
Of the 33 reports included in its sample, the FRC wrote follow-up letters to three companies where there was a substantive question relating to their tax reporting. Correspondence with these companies is ongoing.
Good practice was identified by those companies who provided more information on material tax matters likely to be important to investors, including emerging risks arising from the OECD’s Base Erosion and Profit Shifting (BEPS) actions, and who discussed the effective tax rate (ETR) including commentary on variances on prior periods, key influences and the expected future rate.
The FRC said it was pleased to find examples of disclosures where companies focused on material tax matters where detailed information was likely to be important to investors. These examples included discussion of important tax issues arising in the year and the tax impact of exceptional or non-recurring items; identification of major tax risks faced by the company; explanations of the reassessment of prior year tax estimates where these were significant, for example, changes in assumptions or resolution of open tax enquiries.
However, it also noted that it was unclear how one FTSE 100 company concluded that its strategic report was sufficiently fair, balanced and comprehensive without including details of the nature of re-assessments of prior year estimates which amounted to over 5% of pre-tax profit. Similarly, another FTSE 100 company omitted to explain in its strategic report why tax paid was only 42% of current tax expense (a difference of over 12% of pre-tax profit).
In general, the FRC found that descriptions of significant judgements and estimation uncertainties were often bland and not sufficiently specific to the company’s circumstances. Some companies used ‘boilerplate’ text in their policy descriptions explaining that provisions were established ‘where appropriate’ on the basis of amounts ‘expected to be paid’ to tax authorities.
While 29 of the companies sampled identified uncertain tax provisions as involving significant judgements and estimates, only 45% of these quantified the provision.
Geoffrey Green, chairman of the FRC’s financial reporting review panel and member of the conduct committee, said: ‘Companies’ tax arrangements are currently subject to considerable public interest prompting a demand for clear, concise and transparent tax reporting in annual reports and accounts.
‘This report shares our findings from the thematic review, including examples of good practice, against which companies are encouraged to assess and enhance their own disclosures to ensure they provide high quality information to users in their annual reports and accounts’.
The FRC’s Corporate Reporting Thematic Review: Tax Disclosures is here: https://www.frc.org.uk/Our-Work/Publications/Corporate-Reporting-Review/...
