New UK GAAP: deferred tax

Changes could impact on profits and net assets

It is important to get to grips with the main areas that will change under the new GAAP.  

Apart from the slightly different terminology and format of the accounts, there are certain items that are dealt with and/or disclosed differently in FRS 102 

One of these areas is deferred taxation. FRS 19 requires that deferred taxation should be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date.

The standard specifies that deferred tax should not be recognised on any permanent differences. 

FRS 102 also requires that deferred tax is recognised in respect of all timing differences at the reporting date.

The standard goes on to offer a more detailed definition, setting out that 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. 

So far, so good. It follows that, under both standards, there should be a deferred tax provision where there are accelerated capital allowances; this is a concept that accountants are familiar with.

However there are important differences between FRS 19 and FRS 102. 

Key differences

FRS 19 paragraph 14 states:

‘Deferred tax should not be recognised on timing differences arising when other non-monetary assets are revalued, unless by the balance sheet date, the reporting entity has: 

(a)  entered into a binding agreement to sell the revalued assets; and

(b)  recognised the gains and losses expected to arise on sale.’ 

By contrast, FRS 102, paragraph 29.15 states:

‘Deferred tax relating to a non-depreciable asset that is measured using the revaluation model in Section 17 Property, Plant and Equipment shall be measured using the tax rates and allowances that apply to the sale of the asset.’  

The same applies to investment properties, as set out in paragraph 29.16:

‘Deferred tax relating to investment property that is measured at fair value in accordance with Section 16 Investment Property shall be measured using the tax rates and allowances that apply to sale of the asset, except for investment property that has a limited useful life and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the property over time.’ 

There is another difference between FRS 19 and FRS 102 that will affect group companies. Paragraph 21 of FRS 19 states:

‘Tax that could be payable (taking account of any double taxation relief) 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: 

(a)  dividends have been accrued as receivable; or

(b)  a binding agreement to distribute the past earnings in future has been entered into by the subsidiary, associate or joint venture.’ 

The position post-FRS 102 is slightly different. Paragraph 29.9 states:

‘Deferred tax shall be recognised when income or expenses from a subsidiary, associate, branch, or interest in joint venture have been recognised in the financial statements, and will be assessed to or allowed for tax in a future period, except where: 

(a) the reporting entity is able to control the reversal of the timing difference; and

(b) it is probable that the timing difference will not reverse in the foreseeable future. 

Such timing differences may arise, for example, where there are undistributed profits in a subsidiary, associate, branch or interest in a joint venture.’ 

It is really essential that those responsible for preparing entities’ accounts familiarise themselves with the differences between FRS 102 and current UK GAAP as soon as possible.

The implementation date for new UK GAAP is 1 January 2015; this means that any accounts with a reporting period starting on or after 1 January 2015 MUST be prepared using new GAAP. Those accounts will require a comparative. 

So, an entity with a year end of 31 December will have to use new GAAP for the year end 31 December 2015 (as it begins on or after 1 January 2015), and also for the year ended 31 December 2014, to provide the comparative for 2015.