FRS 102 Centre - TaxThe biggest change in UK accounting for generations
FRS 102 – Tax Implications
FRS 102 will apply for accounting periods commencing on or after 1 January 2015 to all entities that do not prepare their accounts in accordance with IFRS or FRSSE.
It may be that in some circumstances the introduction of FRS 102 will initially improve tax cash flows, which may mean that early adoption is advantageous.
Do you know how FRS 102 will affect your tax position?
The implementation of FRS 102 will have a significant impact on the accounts of many UK companies, and these changes potentially have tax implications. Below outlines some of those key areas that businesses need to be aware of.
All tax computations use as their starting point the reported profit in the accounts, with adjustments only made for specific items as required by tax law.
FRS 102 introduces a number of changes that affect profits, from changes to the calculation of accounting entries to recognising changes in values that weren’t previously included in the profit and loss account. Most of these changes will have a corresponding impact on the tax charge.
It is likely that overall reported profits and consequently taxable profits will be more volatile as a result of FRS 102.
FRS 102 can affect reported profits in a number of ways:
- The value of some debts and financing arrangements, (technically referred to as financial instruments and derivatives), will be stated at fair value at each year end, with changes in value passing through the profit and loss account. This will include interest free loans, where the lack of interest may initially lead to the book value of the debt being written down, with subsequent increases over time until the loan is repaid. For companies the tax treatment will follow the accounts so these accounting adjustments will have a tax impact;
- When a business is purchased more separate intangible assets could be identified as assets acquired as well as goodwill, including intellectual property, customer lists and brand names. These will be amortised separately, and the existing presumptions regarding economic life and amortisation periods are changed. For example, a brand name may have a perceived useful life significantly longer than that of lists of existing customers. For companies that receive tax relief for this amortisation these changes in timing will affect the timing of tax relief;
- Software costs will now be treated as intangible assets instead of tangible assets, so tax relief will be based upon accounting amortisation rather than separate (and usually much slower) capital allowances;
- Lease incentives, such as rent-free periods, will now be spread over the full term of the lease, extending the period over which the reduced expense is recognised in the accounts and consequently spreading the resulting extra tax over a longer period;
- Holiday pay accruals will now be required, and if employees don’t use all their entitlements within 9 months of the year end then tax relief will be delayed into the next accounting period;
- Biological assets (living plants and animals) can optionally be included in stock at fair value instead of cost. This may give rise to fluctuations in profit, which will flow through into the tax charge;
- Movements in investment property valuations will now be reflected, although this will not have a tax impact.
On adoption of FRS 102 the opening balance sheet carrying values in the majority of these areas will be restated, with adjustments – which effectively represent the cumulative differences there would have been in historical profits if FRS 102 had always been in place – being taken directly to brought forward profit and loss reserves. Restatement of existing operating leases is however optional.
Generally such opening balance adjustments are brought into account as a tax adjustment in the first period of the new treatment, although there are specific alternatives for some cases arising from FRS 102 changes. The tax impact of these adjustments may be able to be spread over 10 years (loan relationships and derivatives) or 6 years (biological assets).
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