The challenging economic environment and an increase in reported losses by entities has prompted the Financial Reporting Council (FRC) to revisit the topic of deferred tax asset accounting and disclosures in a thematic review.
Reported losses have often been accompanied by increased recognition of material deferred tax assets. Although the review does not identify any obvious issues in relation to the amount of deferred tax recognised, it does note that in some cases it was difficult to make a full assessment due to the lack of informative disclosure.
Consequently, the principal findings are in relation to disclosures. By providing extracts from certain annual reports and accounts, the report aims to demonstrate the characteristics of better disclosure of deferred tax asset information.
Specificity of convincing evidence
The FRC notes that most loss-making companies gave only boilerplate disclosures about the nature of evidence used to assess the recoverability of net deferred tax assets. Disclosures should provide company-specific information about the nature of convincing evidence supporting the recognition of deferred tax assets, especially when there is a recent history of losses.
The better disclosures refer either to specific improvements in profitability expected to occur in the forecast period, or to the loss having been the result of a one-off event. The report provides examples of positive and negative evidence relevant to assessing the probability that future taxable profits will be available.
Reassessing the level of recognition of deferred tax assets may be required when there are material changes to the deferred tax liabilities in the same taxable entity and tax jurisdiction.
Judgements and estimates
Although the FRC noted a general improvement in the disclosure of judgements and estimates in another recent thematic review, it found this not to be the case when it came to those related to deferred tax assets.
It also found minimal disclosure of the specific nature of key judgements and major sources of estimation uncertainty, with very few companies disclosing sensitivities to changes in assumptions or the range of possible outcomes within the next financial year. Companies are reminded to ensure such disclosures are made.
In some cases, disclosures required by IAS 12 were omitted or disclosed material deferred tax balances, or movements in balances, that were not explained in the accounts. It is important to provide disaggregated information about material components of the tax expense and deferred tax balances to assist users of the financial statements understand tax-related information.
The report highlights good examples of informative, transparent tax disclosures, reflecting the requirements of IAS 12 as well as the expectations set out in the ESMA public statement and the FRC’s previous thematic review of tax disclosures in 2016. Examples include disclosure of the expected period of recovery of deferred tax assets, and geographical analysis of tax disclosures.
Deferred tax disclosures should be transparent, informative and consistent across the annual report and accounts (eg, with other tax disclosures and/or the narrative tax disclosures included in the strategic report).
In addition, the underlying assumptions used in companies’ estimates of future taxable profit should be consistent with their impairment, viability and going-concern forecasts (subject to some specific differences).
A small number of companies specifically disclosed that the potential effect of climate change on the recoverability of deferred tax assets had been considered. However, there should be an explanation of the extent to which climate-change risks have been reflected in deferred tax judgements and estimates, which should also be consistent with the degree of emphasis placed on those risks in the narrative reporting.
With the goal of providing high-quality disclosures in mind, companies are encouraged to consider the FRC’s key findings and expectations set out in the thematic review when drafting their upcoming annual reports and accounts.
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