GAAP: Deferred tax

How will deferred tax change under FRS 102?

Current accounting treatment

FRS 19 requires that deferred tax should be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date; and should not be recognised on permanent differences. Deferred tax should not be recognised on timing differences arising when non-monetary assets are revalued, unless, by the balance sheet dates, the reporting entity has entered into a binding agreement to sell the revalued asset and recognised the gains and losses expected to arise on sale. 

Tax that could be payable on any future remittance of the past earnings of a subsidiary, associate or joint venture should be provided for only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute the past earnings in the future has been entered into.

Accounting treatment under FRS 102

Deferred tax shall be recognised in respect of all timing differences at the reporting date. Timing differences are differences between taxable profits and total comprehensive income, arising from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the accounts.

Deferred tax relating to a non-depreciable asset that is measured using the revaluation model, or to investment properties measured at fair value, shall be measured using the tax rates and allowances that apply to the sale of the asset. 

Deferred tax shall be recognised when income or expenses from a subsidiary, associate, branch or interest in a joint venture have been recognised in the financial statements and will be assessed to or allowed for tax in a future period, except where the reporting entity is able to control the reversal of the timing difference and it is probable that the timing difference will not reverse in the near future. 

When the amount that can be deducted for tax for an asset (other than goodwill) that is recognised in a business combination is less (more) than the value at which it is recognised, a deferred tax liability (asset) shall be recognised for the additional tax that will be paid (avoided) in respect of that difference. Similarly, a deferred tax asset (liability) shall be recognised for the additional tax that will be avoided (paid) because of a difference between the value at which a liability is recognised and the amount that will be assessed for tax. 

Reporting and commercial impact of the changes

The main impact on financial reporting is likely to be additional deferred tax provisions relating to revaluations which may affect the results of the entity by reducing its distributable profits; however, a deferred tax provision in respect of a gain on an investment property measured at fair value is not treated as a realised loss, ie as a reduction in distributable profits, as such gain is regarded as unrealised. Additionally there will be an increase in provisions on the balance sheet.


The transition section of the standard is silent on the treatment of deferred tax and accordingly the general transitional procedures in FRS 102 will apply to deferred tax on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102. For instance a deferred tax liability may need to be recognised at transition date in respect of a gain on an investment property re-measured at fair value on first-time adoption.