UK guidance addresses income tax in interim periods

With the 2021 interim reporting season rapidly approaching, the UK’s Financial Reporting Council (FRC) has provided examples companies should follow when doing their interim reporting and identified areas that often require further scrutiny.

The document Thematic Review: Interim Reporting also includes a section on determining income tax in interim periods. It lists best practices to follow, including its expectation that companies disclose the basis for determining the income tax rate for the half year.

Companies also should explain whether tax rates have been determined using a weighted average of tax rates across jurisdictions and income categories or if they have been estimated and applied individually, the report said.

“When companies apply a weighted average of tax rates we expect companies to disclose how the rate was determined,” it said.

Companies also should consider the disclosure requirements of IAS 12 ‘Income Taxes’ when explaining and updating information related to significant changes in current and deferred taxes during the interim period, according to the report.

That includes disclosure of a breakdown of the components of the tax charge — for example, current tax expense, deferred tax expense or income for originating and reversing temporary differences, changes in tax rates and prior period adjustments; and the amount of the deferred tax assets and liabilities recognized at the half year in relation to each type of temporary difference and unused tax loss or credit, it said.

The FRC said that it expects companies with material deferred tax assets, including those related to tax losses, to review their carrying amounts at the half-year. “In doing so, we expect companies to use assumptions consistent with their going concern and impairment assessments as indicated in our recent Covid-19 Thematic.”

Where companies recognize significant additional deferred tax assets on tax losses above the level of their deferred tax liabilities at the half-year, there should be disclosure of evidence that supports its recognition if the company has suffered a loss in either the current or preceding period in line with the requirements of paragraph 82 of IAS 12, the report said.

To the extent that there is a significant change in the amount of tax losses not recognized as deferred tax, companies should disclose the amount of the change in tax losses not recognized at the half-year in line with the requirements of paragraph 81(e) of IAS 12, it said.