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Review of tax reporting in accounts

11 November 2016

The FRC’s Corporate Reporting Review Team (CRRT) has carried out a thematic review on tax disclosures in company annual reports and accounts of 33 FTSE 350 companies. 

The report of the review acknowledges that companies’ tax arrangements are currently subject to considerable public interest and that as a result of this stakeholder focus, it is important that disclosures provided by companies on this subject are both clear and relevant. The report also highlights that taxation is an aspect of corporate reporting which frequently gives rise to questions when the CRRT writes to companies about their accounts. 

The report highlights good practice by 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 actions.
  • Discussed the effective tax rate including commentary on variances on prior periods, key influences and the expected future rate.

The principal findings section of the report shows specific examples of good practice of descriptions of material tax matters.

The Report notes, however, that there remains scope for companies to provide better explanations of how they account for tax uncertainties. The FRC highlights that the proposed clarification of IFRS requirements in this area presents an opportunity for companies to consider their approach. On this subject, the FRC encourages companies to:

  • Consider carefully whether there are significant judgements and estimation uncertainties relating to tax, whether previously disclosed information remains relevant in subsequent years’ accounts and whether the disclosure of quantified risk specifically relating to the next year is clear.
  • Appraise what specific information about judgements and estimation uncertainties would be most helpful to users of the accounts. In this respect, the FRC refers to the Financial Reporting Lab’s Accounting policies and integration of related financial information project for further information on the nature of information valued by investors.

The companies whose annual reports were examined in this thematic review had been warned that the CRRT would be examining their tax disclosures so it is perhaps little surprise that it “found evidence of improvements in the transparency of tax disclosures”. Despite this, it is likely that the good practice identified in the report will form the basis of the CRRT’s expectations of tax reporting for all companies whose annual reports it examines following the coming reporting season. 

Read the FRC tax disclosures report.

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