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FRC asks for greater clarity around reporting of tax uncertainties

The Financial Reporting Council (FRC) has asked for greater clarity in company annual reports and accounts over tax uncertainty, when the company does not know the details of future taxes.02 Nov 2016

After studying the reports and accounts of 33 FTSE 350 companies as part of a 'thematic review', the FRC said that there has been an improvement in the transparency of tax disclosures included in strategic reports and in effective tax rate reconciliations.

However, it said, there is "scope for companies to articulate better how they account for tax uncertainties".

The International Financial Reporting Standards (IFRS9), due to come into force at the start of 2018, will bring new requirements in this area, so companies should "consider their approach", the FRC said.

Companies should explain their judgments and estimates over tax, explaining the assumptions they are making or the reasons for uncertainty, and quantifying the amount being carried with some analysis to give readers a better understanding of the situation, the FRC said. 

Geoffrey Green, chairman of the FRC’s financial reporting review panel 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".

Tax expert Heather Self of Pinsent Masons, the law firm behind said: "Companies have generally been reticent about publishing more than the minimum information on their tax risks, due to a fear that complex information would be misinterpreted. But with the growing demands from the public and regulators, including a requirement that all large companies publish their tax strategy next year, we are beginning to see a welcome change in this attitude."

The FRC announced in December 2015 that it would undertake the thematic review to ensure that reporting is done as transparently as possible and in a way that helps readers understand how the relationship between profits and tax paid could change in the future. It wrote to the 33 companies, informing them of its plans to review their tax reporting.

The FRC indicated at the time that "the current interest in certain international tax treaties", including national and international legislative changes and a crackdown by the European Commission into potentially anti-competitive tax arrangements entered into by countries including Luxembourg and Ireland with individual companies, was behind its intended review.