On 31 October 2016, the FRC published a report following its review of certain aspects of tax reporting of 33 pre-informed FTSE 350 companies' annual reports and accounts. 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. The report sets out the FRC's principal findings and examples of good practice in three areas: tax in strategic reports; effective tax rate (ETR) reconciliation disclosures; and uncertainties relating to tax liabilities and assets.

The FRC found evidence of improvement in the transparency of tax disclosures included in strategic reports and in the quality of information provided in ETR reconciliations but identified areas for improvement in disclosures concerning tax uncertainties by explaining the bases for recognition and measurement. The FRC encourages companies to:

  • Consider carefully whether there are significant judgements and estimation uncertainties relating to tax. Where estimation uncertainties are repeated unchanged year on year, the FRC will question 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. The FRC's Financial Reporting Lab found that investors value an understanding of the judgements made and estimations applied by management.

The FRC commented that it will continue to challenge companies that 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.

The FRC's corporate reporting thematic review on tax disclosures can be accessed here: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2016/October/FRC-thematic-review-welcomes-improved-transparency.aspx

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