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FRS19: Deferred Tax

Author: Bridget McNally

[Excerpt] FRS 19, Deferred Tax, was published on 7 December 2000. It becomes mandatory in respect of accounting periods ending on or after 23 January 2002 and supersedes SSAP 15 Accounting for Deferred Tax. Whilst early compliance was an option, most Irish reporting entities will be adopting the FRS for the first time for accounting periods ending on or after 23 January 2002, with listed companies having to consider the implications for both interim and year end reporting. It is timely therefore to consider the implications of this new standard. The main thrust of the standard is a move to the full provision basis of accounting for deferred tax, thus bringing Ireland & the U.K more in line with international standards. The impact of this change may be significant, particularly for listed companies (on both EPS and Financial Statement disclosure) whilst all reporting entities will need to consider the effect on distributable reserves. All companies within the ambit of this FRS will be impacted to a greater or lesser extent. Prompt assessment of, and planning for, the impact on your company will help to avoid a nasty surprise!

SSAP 15 - Main Requirements SSAP 15, which preceded FRS 19, was issued originally in 1978 and revised in 1985. It identified the concept of "timing differences" and defined them as differences between profits or losses as computed for tax as opposed to accounting purposes. These arise from the inclusion of items of income and expenditure in tax computations in periods different from those in which they are included in financial statements e.g. capital allowance rules versus depreciation policies. Timing differences originate in one period and are capable of reversal in one or more subsequent periods SSAP 15 required that deferred tax should be provided on all timing differences to the extent that it was probable that a liability or asset would crystallise and should not be provided for to the extent that it was probable that the asset or liability would not crystallise. The deferred tax provision was to be calculated using the liability method i.e. the rate of tax estimated to be applicable when the timing differences reversed. The SSAP required that net deferred tax assets (debit balances) should be written off unless they were expected to be recoverable without replacement by equivalent debit balances.

FRS 19 - Main Requirements Deferred tax must now be recognised on all timing differences (save for the exceptions outlined below) which exist at the Balance Sheet date. This represents a substantial change to the standard accounting practice set out by SSAP 15 in that, whether or not the timing difference is likely to crystallise, deferred tax must be provided. For example the practice of not providing deferred tax on timing differences arising from accelerated capital allowances, on the basis that it was improbable a liability would crystallise, is no longer acceptable and deferred tax must now be provided. This is a substantial move towards the international practice of a full provision basis. FRS 19 however does permit the following exceptions: â?¢ Deferred tax should not be provided on the revaluation of assets unless there is a binding sale agreement in place at the Balance Sheet date. Where however assets (e.g. short term investments) are continually revalued to fair value, with the changes in value being recognised in the profit & loss account, then deferred tax should be recognised on these timing differences to the extent that the gains or losses do not form part of the current tax computation. â?¢ Deferred tax should not be provided on a gain made on the sale of an asset that is more likely than not to be rolled over into a replacement asset for tax purposes. â?¢ Deferred tax should not be provided on an adjustment to bring non - monetary assets acquired to fair value on acquisition unless a binding agreement to sell the asset is in place. However deferred tax assets previously regarded as not recoverable by the acquired entity (e.g. tax losses forward) may satisfy the recognition criteria in FRS 19 as a consequence of the acquisition. Such assets should be recognised in the fair value exercise. â?¢Tax which may be payable on any future remittance of the past earnings from a subsidiary, associate or joint venture should not be provided for unless: (1) Dividends have been accrued as receivable (2) A binding agreement is in place to distribute the past earnings in the future. In most cases this means that parent companies will not provide for deferred tax in full on the unremitted earnings of overseas subsidiaries. A deferred tax asset should now be recognised if it is more likely than not that it will be recovered. A key requirement is that deferred tax assets should only be recognised " to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. The SSAP 15 provision, whereby deferred tax assets could not be recognised where they would be replaced with equivalent debit balances, is not included in FRS 19. Therefore rules regarding the recognition of such assets have been relaxed. FRS 19 permits discounting of deferred tax assets and liabilities to reflect the time value of money, but does not require it. Where a policy of discounting is adopted, all material items making up the deferred tax balance which have been measured using undiscounted cash flows, should be discounted. Larger companies with dual listings may wish to avoid discounting, as it is likely to create another adjustment in a reconciliation statement to US or IAS GAAP as both regimes ban discounting of deferred tax. The tax rate to be used when calculating deferred tax is the rate that is expected to apply over the period the timing differences are expected to reverse. This rate cannot be estimated and only tax rates and law which have been enacted or substantially enacted by the balance sheet date may be used. Para. 8 of the FRS states that it is not intended to prevent lessors preparing financial statements in accordance with SSAP 21 "Accounting for leases and hire purchase contracts". Many leasing companies in practice provided for deferred tax in full under SSAP 15 and calculated the figures on the basis illustrated in the Guidance notes to SSAP 21. The words of para. 8 are intended to confirm that a company which has been following this approach will not have to make any changes to comply with FRS 19 because it is already providing for deferred tax in full.

excerpt ends. For full text see Accountancy Ireland Vol 34 No 3 June 2002

FRS19: Deferred Tax

Author: Bridget McNally

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