Key points

  • The FRC issued its thematic review on deferred tax assets on 21 September 2022. Its review report sets out findings as well as the FRC’s expectations when companies are accounting for and disclosing deferred tax assets.
  • The scope of the FRC review was on companies applying IFRS, but the principles will equally apply to UK GAAP reporters. In fact, entities in all industries, irrespective of their legal form, should consider this guidance.
What is the issue?
Under IAS 12, entities should recognise deferred tax assets (‘DTAs’) only to the extent that their recovery is probable. In assessing whether the recovery of DTAs is probable, entities need to consider the availability of future taxable profits (including the taxable profits arising from the reversal of taxable temporary differences). This assessment will need to consider both positive and negative evidence. An entity’s assessment should use the same underlying assumptions as other forecasts (such as going concern assessments, viability assessments and impairment reviews), but entities will need to ensure that differences between the standards are reflected.
The FRC highlighted that the existence of taxable temporary differences relating to the same taxation authority and in the same taxable entity are a source of taxable profits which will lead to the recognition of DTAs (subject to the timing of the reversal). It also highlighted that there is no prescribed limit to the period forecast.
Where there has been a history of losses, entities need ‘convincing evidence’ that there will be sufficient taxable profit available against which the unused tax loss can be utilised.
The FRC observed that disclosures of DTAs could be improved, and that it was difficult to make a full assessment of the DTAs in some cases due to a lack of informative disclosures. In particular, entities should:
  • disclose the specific nature of the evidence supporting the recognition of DTAs where there has been a recent history of losses; this should be specific to the company rather than boilerplate language; and
  • disclose the specific nature of key judgements and estimation uncertainty, and therefore the related sensitivities to changes in assumptions or range of possible outcomes within the next financial year.
What is the impact?
The FRC has set out examples of better disclosures, and it has identified opportunities for improvement based on its findings.
The following list of seven key expectations has been provided by the FRC to assist entities in addressing any issues:
  • “Disclose company-specific information about the nature of convincing evidence supporting the recognition of deferred tax assets when there is a recent history of losses.
  • Base forecasts of future taxable profit on assumptions that are consistent with other forecasts used in the preparation of the annual report and accounts (subject to some specific differences).
  • Reassess the level of recognition of deferred tax assets when there are material changes to the deferred tax liabilities in the same taxable entity and tax jurisdiction.
  • Disclose company-specific information about deferred tax judgements and estimates, including relevant sensitivities and/or the range of possible outcomes in the next 12 months.
  • Explain the extent to which climate change risks have been reflected in deferred tax judgements and estimates, consistent with the degree of emphasis placed on those risks in the narrative reporting.
  • Provide disaggregated information about material components of the tax expense and deferred tax balances.
  • Provide transparent and informative tax disclosures that are consistent across the annual report and accounts.”
When does it apply?
The FRC expects entities to consider the guidance immediately and to incorporate the guidance in their reporting and disclosures, where necessary, going forward.
Where do I get more details?
Refer to this link for the FRC’s report. Also, see this link for ESMA’s guidance on the recognition of DTAs arising from carry-forward of unused tax losses.
For more information, contact Dave Walters and Steve Moseley.
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