UK: Tax Implications Of A Change From Existing UK GAAP To FRS102

Last Updated: 18 June 2013
Article by Smith & Williamson


FRS102 is the new accounting standard that will replace UK GAAP and become the accounting standard applicable in the UK and Ireland. It represents a significant change in financial reporting in the UK. FRS102 will come into effect for financial reporting periods beginning on or after 1 January 2015 for those not already using IFRS or FRSSE accounting. Early adoption is permitted for periods ending on or after 31 December 2012.

The change from existing UKGAAP to FRS102 will have tax and company law implications that will need careful consideration. There are a number of tax implications arising from accounting policy decisions and this briefing note highlights a selection of some areas for consideration.

Significant differences between current UK GAAP and FRS102 potentially impacting tax

Some of the changes that will impact on tax planning are listed below:

Accounting policy disclosures

Businesses will be required to disclose the judgements that management have made in applying accounting policies and to provide information about the key assumptions concerning the future and other sources of estimation uncertainty that may materially affect the carrying value of assets and liabilities in the next financial year.

Restatements in respect of errors

Restatement will be required where a prior period error is material as opposed to the current requirement that the error be fundamental. This is likely to result in more prior period adjustments being made. There may therefore be a greater incidence of the tax rules operating where there is an adjustment on a change of basis.

Financial Instruments

There are significant differences between the accounting treatment of financial instruments under IFRS and under UKGAAP, which are imported into FRS102. Under FRS102 financial instruments will be classified as 'basic' or 'other'.

Basic financial instruments will be initially measured at cost and subsequently amortised, except for shares whose value can be reliably measured (which will be fair valued with gains and losses going through the P&L). Where cost is used, the accounting value will be cost less impairment.

With the exception of equity instruments that are not publically traded and for which fair value cannot be measured reliably, all other financial instruments must be measured at fair value with gains and losses recorded in profit or loss. This will include derivative instruments which are often not accounted for under existing GAAP.

Hedge accounting is permitted so long as strict criteria are met.

Intercompany loans that are not repayable on demand must be initially recognised at fair value (being the present value of the future payments discounted at a market rate of interest for a similar debt instrument). Where the terms of the loan are at below market rate, this will result in a lower carrying amount and recognition of a higher interest cost than under current GAAP.

The tax regime generally follows the accounting regime which can therefore be significantly different depending on the standards adopted. However there are some specific rules for tax purposes that will need to be considered. In addition there is currently the opportunity to make disregard elections for certain foreign exchange gains and losses, and derivative contracts. The fact that there will be a greater number of revaluations of financial instruments under FRS102 could mean that there will be a knock on impact to either cash tax (where the tax treatment matches the accounting treatment), or deferred tax (where the tax treatment is different to the accounting treatment). A consultation was issued on 6 June 2013 on potential reform of the loan relationship and derivative tax regime, with changes scheduled for Finance Bill 2014 and 2015. Determining the tax impact of changing over to FRS102 in respect of financial instruments will therefore require consideration of a number of points.

Intangible assets and goodwill

In contrast with existing UK GAAP, where indefinite lives are permitted and there is a rebuttable presumption of useful economic life of 20 years, under FRS102 all intangible assets are assumed to have a finite life and, if it is not possible to estimate the useful life, there is a rebuttable presumption that the life is 5 years.

Depending on accounting treatment and classification of intangible assets as subject to the intangible asset regime or CGT, there may be a need to revisit whether elections are appropriate under the intangible asset regime.

Employee benefits

Unlike existing GAAP which addresses only post-retirement benefits, FRS 102 covers the accounting requirements for all forms of employment benefits including those that are regarded as short-term.

Short-term benefits include not only wages and salaries but also compensated leave such as paid holidays. As a consequence entities that may not have previously made specific provision for holiday pay will need to consider doing so and if their holiday year is more than nine months after their year end the provision will not be allowable for tax purposes until the accounting year in which it is paid. Accounting for pensions may also be different.

Foreign currency translation

Where there are matching forward contracts for a transaction, existing GAAP allows the contracted rate to be used to translate the matched transaction. This option does not exist under FRS 102. Instead, the transaction is translated at the spot rate and the forward contract is recognised as a derivative financial instrument in accordance with Section 12. Hedge accounting might be possible if the strict criteria set out in that section are met. Whether there are any tax impacts arising from this change will depend on the loan relationship and derivative contract legislation applicable and any elections made under the disregard regulations.

Distributable reserves

Deferred tax under FRS102 is different to existing UK GAAP (deferred tax must be provided on a greater range of revalued assets and no discounting of deferred tax assets or liabilities is permitted). As a result of this and possibly other changes mentioned above changes, there may well be an impact on the level of distributable reserves. This could have implications for distribution policies and balance sheet presentation for borrowing and business transaction purposes.


The definition of materiality changes from UK GAAP to FRS102. However HMRC still consider materiality an accounting concept and not a tax concept therefore even with the change in definition it will still exist for accounts purposes and we will therefore need to be aware of it when reviewing adjustments required to calculated taxable profits.

Required action points for those affected

All businesses should as a minimum be considering the impending adoption of FRS102. In addition to accounting presentation, consideration should also be given to the effect on the tax position. This briefing note only covers some of the tax impacts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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