On 8 and 21 September 2022, the Financial Reporting Council published two separate thematic reviews. The reports relating to each review consider and provide guidance for improving the compliance and reliability of listed companies’ disclosures of earnings per share and deferred tax assets.

In both reports, the FRC emphasises the importance of listed companies providing high-quality disclosures and explanations in their financial statements and annual reports, both to improve transparency and to enable the readers to understand calculations relating to earnings per share and deferred tax, as well as management’s considerations behind its decisions. The reports each make use of case studies and examples of listed companies’ past reports to provide illustrations of good practice.

Earnings per share

On 8 September 2022, the FRC published its thematic review on earnings per share (EPS), which all listed companies (including companies reporting under the UK GAAP standard FRS 102) are required to report on in their annual and interim financial statements in accordance with International Accounting Standard 33, including comparatives for the period presented.

The FRC’s review of companies’ financial statements found that the main principles of IAS 33 are not always well understood and notes that, in some instances, when the FRC’s corporate reporting review team had queried certain disclosures, this had resulted in restatement of the company’s EPS in the following year.

The FRC’s report highlights common errors made by listed companies, which generally fall into the following broad issues:

Weighted average number of ordinary shares outstanding: It is not always clear from a company’s disclosures how the weighted average number of shares relates to the number of shares in issue and potential ordinary shares.

Effect of certain arrangements on EPS calculations: The FRC found that it was rarely possible to tell from disclosures when a company had made judgements about how a share reorganisation or other arrangement had affected EPS calculations.

Lack of understanding of IAS 33: The FRC noted that the requirements of IAS 33 often appeared to have been overlooked or not well understood.

The report provides various illustrations of how companies can provide more comprehensive disclosures and improve the reliability of their EPS, but the overarching message is that reporting by companies on EPS can be improved by:

Complying with IAS 33’s specific disclosure requirements: Disclosing any judgements with a material effect on EPS in accordance with paragraph 122 of IAS 1 and their disclosures for adjusted EPS must meet the requirements of the ESMA Guidelines on APMs; and

Explaining the methodology for their EPS calculations: Explaining the basis used for tax on adjusting items and the weighted average number of shares, especially if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares.

Deferred tax assets

On 21 September 2022, the FRC published its findings on the disclosure of deferred tax assets by 20 FTSE 350 listed companies in their annual reports and accounts, as required by the International Accounting Standard for income taxes.

The FRC found that there was generally good disclosure practice amongst the sample companies but that, as more companies have reported losses after the Covid-19 pandemic and have recognised an increased number of material deferred tax assets, it recommends that listed companies should provide more specific disclosure about the nature and extent of supporting evidence used to assess the recoverability of net deferred tax assets.

The report identifies four key ways for listed companies to improve their disclosures:

Provide specific evidence: avoid using boilerplate disclosures of evidence used to assess the recoverability of deferred tax assets and specifically refer to either expected improvements in profitability during the forecast period or to a loss being the result of a one-off event. Companies should separately identify and specifically describe the individual material components of the tax expense and its rationale for the assessment period.

Judgements and estimates: disclose the specific nature of key judgements and the major sources of estimation uncertainty relating to deferred tax assets, changes in assumptions or the range of possible outcomes for the next financial year; and consider the effect of climate change on the recoverability of deferred tax assets.

Transparency: disclose the expected period of recovery of deferred tax assets and geographical analysis of the deferred tax balance and profits/losses in each jurisdiction, ensuring that there is consistency and cross-explanation between narrative disclosures in the reports and financial disclosures in the accounts.

Consistency: ensure underlying assumptions used in estimates of future taxable profit are consistent with their impairment, viability, going concern and future cash flow forecasts. The base forecasts of future taxable profit on assumptions should be consistent with other forecasts used in the preparation of the annual report and accounts, ensuring that there is consistency and cross-explanation between narrative disclosures in the reports and financial disclosures in the accounts.

Further information

Click here for a copy of the FRC’s Thematic review: Earnings per share.
Click here for a copy of the FRC’s Thematic review: Deferred tax assets.

This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.