Summary

Section 29 deals with the recognition, measurement and disclosure of current and deferred tax, VAT and withholding tax on dividends.

What is new?

Deferred tax is recognised on a timing difference plus approach and more deferred tax is recognised under FRS 102 than was recognised under old GAAP (FRS 19).

Deferred tax is required to be recognised on all timing differences at the reporting date except for the following (whereas old GAAP provides a number of exemptions which are not included in Section 29):

• Unrealised tax losses and other deferred tax assets where it is not probable that they can be utilised from future taxable profits;
• Tax allowances on fixed assets, when all conditions for retaining the allowances have been met; and
• Undistributed profits in a subsidiary, associate, branch or joint venture where they are controlled by the entity.

Deferred tax is required to be recognised:

• On revaluations of property, plant and equipment. Deferred tax is required to be recognised on the uplift in value and the deferred tax set against the revaluation reserve up to the amount included in the revaluation reserve. Under old GAAP deferred tax was only required to be recognised if there was a binding sale agreement. Hence where a revaluation has been carried out on transition or a previous revaluation was used as a deemed cost, there will be a transition adjustment. The deferred tax rate to use for non-depreciable assets is the sales tax rate, and where the assets are depreciated the standard corporation tax rate should be utilised.
• On roll over gains which were not required under old GAAP.
• On fair value adjustments to investment property (with the exception of property with limited useful life). Deferred tax at the sales tax rate should be recognised in the profit and loss. Under old GAAP deferred tax was only required to be recognised if there was a binding sale agreement. Hence there will be a transition adjustment to recognise this deferred tax.
• On the difference between the tax value and acquisition fair value on all assets and liabilities (except goodwill) including fair value adjustments, and the other side of the entry goes to goodwill. Deferred tax was only recognised under old GAAP if the deferred tax would be recognised by the acquiree. Even where the exemption not to restate goodwill previously recognised as provided in Section 35 is utilised, on transition deferred tax on the difference between fair value and book value will have to be recognised with the net adjustment posted to profit and loss reserves.
• Given the different treatment of financial assets and liabilities under FRS 102, there may be differences between the tax value and the carrying value which will require deferred tax to be recognised e.g. deferred tax on fair value adjustments on transition for forward contracts and fair valuing investments.
• Where investment in associates, joint ventures and subsidiaries are stated at a revalued amount, deferred tax is required to be provided on the difference between the tax cost and the carrying amount in the financial statements. The rate to be used in calculating the deferred tax is the rate in which the assets are likely to be realised.

Discounting is not permitted under Section 29 whereas under FRS 19 this was permitted. Hence where deferred tax was previously discounted there is likely to be a transition adjustment to reverse the effect of discounting.

What is different?

Under section 22, equity and liabilities, current tax on any share issue costs recognised in equity need to posted to equity whereas under old GAAP this was posted to the tax line in the profit and loss.

No specific disclosure requirement to disclose evidence to support the recognition of the deferred tax asset which was a requirement under old GAAP.

Tax reconciliation should reconcile the expected tax at the average tax rate for the year to the total tax in the profit and loss. Under old GAAP a reconciliation was only required to the current tax charge.

Disclosure required of the expected net reversal of timing differences in the following reporting period under Section 29 whereas this disclosure was not required under old GAAP.

Disclosure of tax expense relating to discontinued operation required under Section 29 whereas no such disclosure was required under old GAAP.

Deferred tax to be recognised on unremitted earnings from subsidiaries where it has been recognised in the financial statements but will not be taxed until later unless the entity can control the reversal of the timing. This contrasts with old GAAP where it was only recognised where there was a binding agreement to distribute.

Other standards affecting Section 29 where differences arise:

Section 35 provides an exemption from restating previously recognised goodwill under old GAAP. However, where this exemption is claimed, there is still an adjustment required to recognise the deferred tax on any fair value adjustments on business combinations with the corresponding entry to profit and loss reserves.

What are the key points?

Current tax is recognised for the tax liability for the current and past periods.

Deferred tax measured using rates enacted or substantively enacted at the balance sheet date that are expected to apply to the reversal of a timing difference except deferred tax recognised on revaluations of non-depreciable property, plant and equipment and fair value adjustments on investment property which are measured at the sales tax rate.

Deferred tax follows the accounting treatment in relation where the other side of the transaction is posted.

When different rates apply to different levels of profit, use an average expected rate.

No discounting of deferred tax.

Deferred tax recognised on fair value adjustments on a business combination with the exception of goodwill.

VAT or similar taxes which are not income taxes are excluded from turnover, expenses are shown net of VAT.

Dividend and interest should be included inclusive of withholding taxes, excluding other taxes.

Deferred tax assets should only be recognised where it is probable that they will be recovered against future taxable profits or the reversal of deferred tax liabilities.

Deferred tax can be reversed when all conditions for retaining the tax allowances have been met.

Deferred tax asset to be recognised within debtors and a deferred tax liability to be recognised within provisions.

What do accountants need to do?

Be aware of the differences between old GAAP and Section 29 so appropriate transition adjustments can be determined.

Advise clients of the area’s where deferred tax will need to be recognised on transition and the cash tax impact on transition to FRS 102 to include how these transition adjustments will be taxed i.e. immediately, over a period of 5 years or whether other special tax rules apply on transition.

Areas to advise clients on include where applicable:

• The need to recognise deferred tax on revaluations on the date of transition where deemed cost is used or revaluations are incorporated;
• The need to recognise deferred tax on fair value adjustments on adoption of Section 11 and Section 12 which resulted in taxable items/tax deductible items falling out of the profit and loss. This taxable/tax deductible amount may have to be included as a transition adjustment as an addback or deduction in the tax computation over a 5 year period from 2015;
• The need to recognise deferred tax on transition adjustments arising as a result of the need to treat a long term loan as a monetary asset which was previously treated as a non-monetary asset under old GAAP. This adjustment will be required to be incorporated into the tax computation so that there are no fall outs for tax purposes;
• For lease incentives where the prior year comparative on transition releases the lease incentive over the life of the lease when previously it was accounted for under old GAAP up to the first break clause, deferred tax will need to be recognised; and
• The need to recognise deferred tax on any fair value adjustments made on business combinations entered into prior to the date of transition even where the exemption contained in Section 35 is availed of. Where the exemption is availed of the deferred tax recognised is posted to profit and loss reserves, where the exemption is not availed of it is posted against goodwill.

Advise clients on the need to ensure that the preliminary tax for 2015 needs to incorporate any additional tax payable as a result of adopting FRS 102 in 2015 where the tax cannot be based on the prior year liability, to include the effect of transition adjustments.

Advise clients on the need for companies to incorporate the new assets, liabilities, income and expenditure into IXBRL tagging for tax purposes so that they are appropriately classified and have appropriate taxonomy.

What do Companies need to do?

Review the balance sheet of the entity and assess what additional deferred tax will have to be recognised on transition to FRS 102 based on the differences highlighted.

Be aware of the possibility of additional tax being payable as a result of transition adjustments and incorporate these into the preliminary tax calculations.

Quantify the impact deferred tax adjustments will have on distributable reserves.