FRC issues amendments to FRS 102 and FRS 101 on deferred tax
We set out the changes to FRS 102 and FRS 101 arising from the Organisation for Economic Co-operation and Development’s (OECD’s) pillar two model rules.
The Financial Reporting Council (FRC) has issued amendments to Financial Reporting Standard (FRS) 102, which is the principle financial reporting standard applicable in the UK and Republic of Ireland, and FRS 101, which sets out a reduced disclosure framework for the individual financial statements of subsidiaries and ultimate parents that otherwise apply the recognition, measurement and disclosure requirements of UK-adopted IFRS.
The amendments relate to international tax reform and the impact of the pillar two model rules.
About the pillar two model rules
The OECD’s pillar two model rules introduce a global system of interlocking top-up taxes. These rules are part of a two-pillar solution to address the tax challenges arising from the digitalisation of the global economy.
The pillar two model rules:
(a) Aim to ensure that large multinational groups pay a minimum amount of tax on income arising in each jurisdiction in which they operate; and
(b) Would achieve that aim by applying a system of top-up taxes that results in the total amount of tax payable on profit in each jurisdiction representing at least the minimum rate of 15%.
FRS 102 amendments
The recent amendments made to FRS 102 by the FRC introduce a temporary exception to the accounting for deferred taxes arising from the implementation of the pillar two model rules, alongside targeted disclosure requirements.
In terms of the additional disclosures, if (based on known or reasonably estimable information) the entity is or expects to be within the scope of pillar two legislation:
(i) The entity is required to disclose that fact; and
(ii) When such legislation has been enacted or substantively enacted by the reporting date but is not yet in effect for the entity, the entity must disclose known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to pillar two income tax arising from that legislation.
To meet (ii) above, an entity is required to disclose qualitative and quantitative information about its exposure to pillar two income tax at the end of the reporting period. The information doesn’t have to reflect all the specific requirements of the pillar two legislation, but can instead be provided in the form of an indicative range. To the extent information is not known or reasonably estimable, an entity is required to disclose a statement to that effect and information about the entity’s progress in assessing its exposure.
FRS 101 amendments
The FRC’s amendments to the FRS 101 reduced disclosure framework make an exemption available from some of the disclosure requirements in International Accounting Standard (IAS) 12 income taxes that are primarily relevant to the consolidated financial statements of a group.
The exemption is available provided that equivalent disclosures are included in the consolidated financial statements in which the qualifying entity is included.
This temporary exemption is effective immediately and the disclosure requirements are effective for accounting periods beginning on or after 1 January 2023, with early application permitted.
Similarly, in May 2023, the International Accounting Standards Board (IASB) issued international tax reform pillar two model rules. The board’s amendments to IAS 12 income taxes introduced a temporary exception to the accounting for deferred tax arising from the implementation of the pillar two model rules, alongside targeted disclosure requirements.
These changes were adopted for use in the UK by the UK Endorsement Board on 19 July 2023.