The UK's Financial Reporting Council (FRC) published its thematic review, Deferred Tax Assets. The review considers the basis of recognition of, and disclosure in relation to, deferred tax assets in the light of the effect of the COVID-19 pandemic on companies' profitability. It follows the FRC's previous thematic review, Tax Disclosures, issued in October 2016.
The regulator conducted a limited-scope review of the annual reports and accounts of 20 companies from a cross-section of industries. The FRC considered the basis of recognition of deferred tax and the related disclosures under IAS 12, Income Taxes.
The companies were selected from across the Financial Times Stock Exchange 100 Index (FTSE 100), FTSE 250, and others listed on the Main Market of the London Stock Exchange. The FRC also assessed "whether the evidence supporting the recognition of deferred tax assets for losses appeared to be sufficiently robust, and consistent with the annual report and accounts as a whole."
The review highlighted several areas where companies are not meeting the specific requirements of IAS 12 and offered opportunities for improvement in relation to deferred tax asset disclosure.
The review offers four key focus areas for companies to improve disclosure quality:
Specificity of convincing evidence: Companies should refer to either specific improvements in profitability expected to occur in the forecast period, or to the loss having been the result of a one-off event. It is important that companies give more specific disclosures about the nature of the convincing evidence they use to support the recognition of deferred tax assets when they have a recent history of losses, the FRC review said.
Judgements and estimates: Disclosures should contain the specific nature of key judgements, and major sources of estimation uncertainty, in relation to deferred tax assets. Companies should also disclose sensitivities to changes in assumptions or the range of possible outcomes within the next financial year and whether the potential effect of climate change on the recoverability of deferred tax assets has been considered.
Transparency: Companies should submit all disclosures required by IAS 12 and should not disclose material deferred tax balances, or movements in balances, that are not explained in the accounts.
Consistency: Companies' estimates of future taxable profit should be consistent with their impairment, viability, and going concern forecasts (subject to some specific differences).
Additionally, the FRC listed its key expectations of companies. Those include that companies:
- 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.
- 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.
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