FRS 102 will present a number of changes to previous accounting treatment and practice. Some of these changes will impact your company's tax in terms of recognition within the statutory accounts and/or the actual tax liabilities payable to HMRC.
Subject to certain exceptions, the change to FRS 102 for medium or large entities is mandatory for the accounting period beginning on or after 1 January 2015 and for small (non-micro) entities, application will be for accounting periods commencing on or after 1 January 2016.
Where there is a change in accounting policy, the adjustment that takes a balance from the closing figure under the old policy to the opening balance under the new rules is usually taxed in the first accounting period for which the new policy is adopted, though some adjustments may be spread over five, six or ten years.
Under FRS 102, all intangible assets are assumed to have a finite useful economic life (UEL), and if it is not possible to estimate the UEL then the presumption is that the UEL is a maximum of ten years. This may result in accelerated tax deductions for some companies, but also may result in discussions with HMRC about appropriate valuation and amortisation policies.
Some assets, such as website and software development costs, could be reclassified as intangible fixed assets. This change could provide companies with an opportunity to make additional claims for R&D tax relief (or credits) under the R&D tax credit regime.
FRS 102 will introduce more fair value accounting for financial instruments. This will increase volatility in the company's profit and loss account, with potentially greater volatility in taxable profits. However, it may be possible for companies to mitigate the effect of these fair value adjustments in certain circumstances.
The Loan Relationships and Derivative Contracts Regulations, known as the 'disregard regulations', apply to disregard the effect of these fair value adjustments for certain financial instruments. This will be of interest to companies with hedging relationships in respect of currency, commodity, debt and interest-rate contracts.
FRS 102 requires that certain intercompany loans at non-market rates are measured initially at the present value of the future payments discounted at a market rate of interest. Subsequent measurement will generally be at amortised cost. This will effectively mean discounting the initial value and unwinding that discount over the term of the loan.
The accounting and tax treatment of these adjustments will depend on the relationship between borrower and lender, whether they are companies or individuals and whether the loan was in place before or after the adoption of FRS 102. This can result in tax liabilities or relief arising in the year of transition, and/or tax relief or taxable income as the discount is subsequently unwound.
Some planning opportunities may exist to defer or mitigate the impact of intercompany loans at non-market rates.
FRS 102 requires investment properties (properties that can be measured reliably, without undue cost or effort) to be measured at fair value at each reporting date. Movements in the fair value of investment properties are recognised within the profit and loss account.
The fair value movements continue not to be taxable until the ultimate disposal of the properties.
Lease incentives such as rent-free periods are to be spread over the entire lease term, rather than the period to the earliest break/rent review as is the case under old UK GAAP. This will generally result in a deferral of taxable income for tenants.
For existing leases, companies must choose whether to retain the existing allocation or restate their figures to spread the incentive over the entire lease period. This can have a significant impact on covenant compliance, distributable profits and corporation tax.
Though deferred tax under FRS 102 is still based on a timing differences approach, discounting is not permitted and the list of exemptions is different. Generally, deferred tax will be recognised on more items, including:
- on the revaluation of non-monetary assets, such as fixed assets or investment properties, irrespective of any agreement to sell or the availability of rollover relief
- on fair value adjustments to subsidiaries' net assets in consolidated accounts
- on rolled-over gains prior to the assets, into which the gains have been rolled over, being sold
- on unremitted earnings of subsidiaries, associates and joint ventures.
This makes the calculation of deferred tax more complex and may impact distributable reserves. In turn, this could have implications for distribution policies and covenant compliance.
FRS 102 requires companies to make an annual accrual for the value of leave to which employees are entitled but have not yet taken. This is likely to most impact companies where the holiday year and the financial year are different, or where each employee's holiday year is set by the date they began their employment.
The accrual will be tax deductible when it is accrued, provided that the leave is taken within nine months of the end of the accounting period. In practice, this is likely to prove difficult to monitor.
There are a number of disclosure differences between FRS 102 and UK GAAP. Some notable new requirements under FRS 102 include:
- reconciliation to total tax rather than to current tax. Timing differences will therefore no longer represent reconciling items
- disclosure of the net reversal of deferred tax expected to occur in the following period. The aim of this is to give users of the accounts a clearer view of the cash flows surrounding deferred tax
- disclosure of the tax expense relating to discontinued operations
- no disclosure of movements in deferred tax balances or unrecognised deferred tax amounts.
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