News December 2015 FRC calls for transparent disclosure of tax risks in corporate reports

FRC calls for transparent disclosure of tax risks in corporate reports

01 December 2015

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The Financial Reporting Council (FRC) will conduct a thematic review of companies’ tax reporting to encourage more transparent recording of the relationship between the tax charges and accounting profit. The required disclosures are key to helping users understand the significant factors that could affect that relationship in the future. 

The FRC will write to a number of FTSE 350 companies prior to their year-end, informing them that the Corporate Reporting Review Team will review the tax disclosures in their next published reports. The aim of this monitoring activity is to drive continuous improvements in the quality of corporate reporting. 

The FRC plans to take a particular interest in:

  • the transparency  of tax reconciliation disclosures and how well the sustainability of the effective tax rate is conveyed; and

  • uncertainties relating to tax liabilities (and assets) where the value at risk in the short term is not identified.

Companies are required to disclose the principal risks and uncertainties they face and are expected to explain the actions they propose to mitigate the impact of those risks.  The FRC’s targeted review will consider the totality of the companies’ reporting including relevant disclosures in their strategic and other narrative reports as well as the detailed accounting disclosures.

Geoffrey Green, Chairman of the FRC’s Financial Reporting Review Panel and member of the Conduct Committee, said:

“There is considerable public interest currently in international tax arrangements, prompted by developments both in the UK and on a global basis. Investors have a heightened interest in wanting to understand the policy decisions made by companies and the impact these have on their current and future accounts. Through the FRC’s Clear & Concise initiative, the FRC aims to stimulate boards to review their tax disclosures to ensure their annual reports provide high quality information for investors.  Companies which are clear about their tax risks will be looked to as examples of good practice while in other cases, there will be an identification of where improvements may be made. Consistent with its overall objective, the FRC will consider how to publically share the best of what is seen to help others raise the quality bar on this aspect of their reporting”.   


Notes to editors:

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
  2. The Conduct Committee is a body authorised under the Companies Act 2006 (the Act) to review and investigate the annual accounts, strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK International Financial Reporting Standards.
  3. Where breaches of the Act are discovered the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts, strategic or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means. If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision. To date no court applications have been made.
  4. IAS 12, ‘Income Taxes’, paragraph 81, includes a set of possible disclosures that paragraph 84 states should enable users to understand whether the relationship between tax expense (income)  and the accounting profit is unusual and to better understand the factors that could affect that relationship in future.  The standard states that in explaining that relationship, an entity should use an applicable tax rate that provides the most meaningful information to the users of its financial statements.
  5. IAS 1, ‘Presentation of Financial Statements’, paragraph 125 requires Boards quantify uncertain assets and liabilities and to disclose the assumptions they make about the future and other major sources of estimation uncertainty at the end of the year that have a significant risk of leading to a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
  6. The FRC recognises the current interest in certain international tax treaties which has prompted proposals for additional disclosures.  The OECD has published final papers including principles for the revision of bilateral tax treaties.  At a regional level, the European Commission has established probes into tax structures that were the beneficiary of special tax arrangements in EU countries such as Luxembourg and Ireland, whilst in the UK, new rules have been introduced.  
  7. The Conduct Committee maintains a Financial Reporting Review Panel (FRRP). The Chairman is Geoffrey Green and the Deputy Chairs are Joanna Osborne and Ian Wright. There are currently 21 other members drawn from a broad spectrum of commerce and the professions. Individual cases may be dealt with by a specially constituted Review Group of the FRRP.

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