Accountants Accounting and Reporting Policy Research Activities Improving the Financial Reporting of Income Tax

Improving the Financial Reporting of Income Tax

The Accounting Standards Board (ASB) of the FRC and the European Financial Reporting Advisory Group (EFRAG) published a paper in order to solicit views on how the financial reporting of income tax could be improved.

Tax is an important expense for most companies, and transparent and complete financial reporting is complex because the tax effects of transactions do not always fall in the same period as they are reported in the financial statements.

Requirements for the financial reporting of income tax are currently set out in IAS 12 ‘Income Taxes’. Some consider that the information that is provided in compliance with that standard is not as useful as it might be, and that the standard is cumbersome and difficult to understand and apply in practice.

The new paper discusses ways in which the usefulness of information prepared in accordance with IAS 12 could be enhanced. In particular it discusses possible changes to the reconciliation of tax expense to a standard rate; revisions to the requirements in respect of uncertain tax positions; and whether deferred tax should be discounted.

The paper also discusses alternative approaches that could form the basis for a new accounting standard that would replace IAS 12. These are the flow-through approach (under which only the tax payable on taxable income for the period is reported as an expense); the partial allocation approach (under which only those tax effects likely to affect the tax payable for future periods is deferred); the valuation adjustment approach (under which tax effects are dealt with as part of the carrying amount of related assets and liabilities); and the accruals approach (under which the tax effect of all transactions are recognised and allocated to the period to which they relate).

Read the Discussion Paper

In February 2013 EFRAG and the FRC published a Feedback Statement on the discussion paper, which provides an analysis of comment letters received on this consultation.

Respondents generally welcomed the Discussion Paper as an introduction to an important debate. Most agreed that the current accounting standard, IAS12, is complex to apply and supported attempts to simplify its requirements. Almost all respondents said that its deficiencies were on both a conceptual and an application level. However, they also felt that the standard is not fundamentally flawed and is generally well-understood by preparers and users of financial statements. A fundamental change to the existing model for the accounting for income tax may therefore add further complexity and may not satisfy user needs. The best way forward would be to address the deficiencies through limited improvements to the standard.

The few respondents that supported a complete rethink of IAS 12 expressed support for the accruals approach outlined in Part 2 of the Discussion Paper. According to them, income tax accounting should be based on a principle that requires tax assets and liabilities to be recognised in accordance with the recognition criteria under the IASB’s Conceptual Framework.

The feedback statement can be downloaded here.