The UK Accounting Council has developed three new Financial Reporting Standards (FRSs) - FRS 100, 101, and 102 - to replace existing UK GAAP (other than the FRSSE) and introduce a reduced disclosure framework for certain IFRS preparers. Companies will face major decisions as to which reporting standard to adopt and a potentially significant compliance burden in managing the change.
FRS 101, the IFRS reduced disclosure framework for qualifying entities, was published at the end of 2012. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland was published on 14 March 2013. Adoption is mandatory for accounting periods beginning on or after 1 January 2015, although early adoption is possible.
What are the key tax considerations?
Tax could be a key factor in the decision that companies face when choosing between adopting full IFRS/FRS 101, and FRS 102. The following areas should be considered both when making the decision and in planning for the transition:
- Cash tax - the change of GAAP may result in changes in the timing and amounts of cash tax payable. In particular, the taxation of transitional adjustments will need careful consideration given the flexibility provided by the early adoption options.
- Compliance requirements - there may be an increased burden on tax compliance teams as new areas of tax legislation could become relevant.
- Tax accounting calculations and processes - FRS 102's 'timing difference plus' and IFRS/FRS 101's 'temporary difference' approaches may give rise to larger deferred tax balances than would be the case under current UK GAAP. Overall, it seems possible that a move from UK GAAP to the FRS 102 or IFRS/FRS 101 may increase the compliance burden on tax reporting teams because of their wider scope in respect of deferred tax.
- Tax systems and processes - tax systems, whether based on tax reporting and compliance software or spreadsheets and accounting systems may need to be updated and amended for the new GAAP. This can give the opportunity to put in place improved processes offering longer term efficiencies and effectiveness.
What should companies be doing now?
The transition to a new GAAP requires input from many stakeholders within a company and tax should be on the agenda from the start.
Companies or groups currently following UK GAAP will need to move to FRS 101, FRS 102 or full EU-adopted IFRSs for periods beginning on or after 1 January 2015, with comparatives required for 1 January 2014 onwards. FRS 101 and 102 may be adopted early for accounting periods ending on or after 31 December 2012. Of course, companies and groups can alternatively transition to full EU-adopted IFRSs at any time.
Change is no longer hovering beyond the horizon but coming clearly into view. These developments have far-reaching implications for nearly all UK reporters. Affected companies will need to start thinking about how the change will impact their financial statements and tax returns and consider the wider business impacts including distributable profits, banking arrangements, systems and performance management. Done right, and at the right time, these changes could streamline group accounting and tax processes for the long term.
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