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The impact of FRS 102 on tax accounting

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FRS 102 was issued in March, replacing the existing UK GAAP. Deferred tax under the new standard is accounted for using a ‘timing differences plus’ methodology which is based on FRS 19, but with some additional requirements to give a result more consistent with IAS 12. The biggest changes include the requirements to recognise deferred tax in a business combination, as well as for revalued assets. Adoption is retrospective and is mandatory for accounting periods beginning on or after 1 January 2015. Therefore, the time to develop a plan of adoption is now.

FRS 102 has arrived. On 14 March 2013, the Financial Reporting Council issued FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, otherwise known as the ‘new’ UK GAAP.

This is the third standard in the complete overhaul of the existing UK GAAP, following the issuance of FRS 100 Application of Financial Reporting Requirements, and FRS 101 Reduced Disclosures Framework in 2012. The foundation for FRS 102 is the IFRS for SMEs with some modifications, most notably the complete replacement of Section 29, Income Taxes, and other tweaks to accommodate the various requirements of UK company law.

Section 29 is a more comprehensive approach to accounting for income taxes, but is simpler than IAS 12 Income Taxes. Section 29 combines the requirements of FRS 19 Deferred Tax, with elements borrowed from IAS 12, creating the new ‘timing differences plus’ methodology. This is a good thing, because not all statutory reporting entities routinely maintain ‘tax balance sheets’ (nor do they necessarily need to). Under FRS 102, no ‘tax basis balance sheet’ is required, but the results will be much closer to the results had IAS 12 been applied.

So, what’s the same?

Let’s begin with what’s the same. For an entity that has historically always reported under the existing UK GAAP, take comfort as many of the requirements of FRS 102 will look familiar.

  • Current tax: Current tax is still the tax estimated to be payable to the tax authorities.
  • Deferred tax: The ‘timing differences’ approach has been maintained (subject to the modifications discussed below).
  • Recognition of deferred tax assets: FRS 102 uses the word ‘probable’ as a threshold for the recognition of deferred tax assets. ‘Probable’, however, is defined as ‘more likely than not’.
  • The use of ‘substantively enacted’ tax rates: FRS 102 contains the same language regarding the legislative process in the UK and Ireland.
  • Uncertain tax positions: Like FRS 16, FRS 102 provides no explicit guidance for the recognition or measurement of ‘uncertain tax positions’. It seems that nobody outside the US is ready to tackle this topic. Therefore, continue as before.
  • Deferred tax on share-based payments: The ‘timing difference’ approach applies, as under FRS 19, but differs from IAS 12 in that the benefit of tax deductions in excess of compensation expense is not recognised until realised.
  • Offsetting of deferred tax assets and liabilities in the balance sheet: Whilst the wording is closer to IAS 12, the requirements are consistent with FRS 19.

What’s new?

While FRS 102 eliminates much of the text contained in FRS 16 and FRS 19, it does add some new guidance, much of which has been borrowed from IAS 12.

  • Glossary of defined terms: Rather than cluttering up Section 29 with definitions, there is a new glossary of defined terms in Appendix 1 to FRS 102. Among those defined terms is ‘substantively enacted’, providing guidance for jurisdictions outside the UK and Ireland: ‘Tax rates shall be regarded as substantively enacted when the remaining stages of the enactment process historically have not affected the outcome and are unlikely to do so’.
  • Deferred tax on investment properties and non-depreciable assets: This guidance borrows from the recent amendments to IAS 12. Under FRS 19, no deferred tax would have generally been recognised on revalued investment properties, since the revaluation would have been recognised directly through reserves. Under Section 16 Investment Properties, changes in the fair value of investment properties are recognised in profit or loss. Deferred tax on an investment property that is measured at fair value is calculated using the tax rates and allowances that apply to sale of the asset, except for investment property that has a limited useful life and is held within a business model whose objective is to consume substantially all of its economic benefits over time. The same rule applies to non-depreciable assets (e.g. land) that are measured using the revaluation model in Section 17 Property, Plant and Equipment. In the UK, the tax base used for calculating chargeable capital gains on disposal differs from the tax allowances available from use – which had previously led to large deferred tax liabilities being recognised under IAS 12.
  • Distributed vs undistributed profits rate: Some jurisdictions impose taxes at a higher or lower rate depending on whether earnings are paid out as dividends or retained. Consistent with IAS 12, entities should use the tax rate applicable to ‘undistributed’ profits until a liability is recognised for the payment of a dividend.
  • Presentation of deferred tax on pensions: While there is no difference in the calculation of deferred tax, FRS 17 Retirement Benefit Schemes required that the associated deferred tax be presented with pensions. No similar requirement exists in FRS 102, therefore it should be presented together with other deferred taxes.

What’s very different?

Although the foundation of FRS 102 is the same ‘timing differences’ approach used in FRS 19, some things are clearly different in the new standard, some of which has been borrowed from IAS 12. The differences include:

  • Discounting: FRS 102, like IAS 12, prohibits the discounting of any deferred tax balances.
  • Business combinations: Under FRS 102, deferred tax is recognised in a business combination when the fair value of assets (other than goodwill) and liabilities acquired differs from the amount attributed for tax purposes (e.g. the amount of future tax deductions). The offset is a corresponding adjustment to goodwill. The largest impact of this will likely be to recognise deferred tax on acquired intangibles. The recognition of deferred tax means that subsequent amortisation will no longer be akin to a ‘permanent difference’ under existing UK GAAP.
  • Revalued assets: FRS 102 requires that deferred tax be recognised on all timing differences whether arising in profit or loss, other comprehensive income, or equity. Revalued assets will therefore now require deferred tax to be recognised on any revaluation gains or losses. Under FRS 19, no deferred tax was recognised on revalued assets unless there was a binding commitment to dispose.
  • Investments in other entities: Deferred tax is recognised for timing differences where income (loss) from a subsidiary, associate, branch or interest in a joint venture has been recognised in the financial statements which will be taxable (deductible) to the investor in a future period, except where the entity can control the reversal of the timing difference and it is probable that the difference will not reverse in the foreseeable future. This differs from existing practice where tax was accrued only upon the receipt or other binding agreement to remit dividends. This may cause additional deferred tax liabilities to be recognised, particularly in respect of investments in joint ventures and associate entities where dividend distributions cannot be controlled.


The disclosure requirements are not significantly different from existing UK GAAP, however there are some new points to be aware of:

  • Rate reconciliation: FRS 19 required a reconciliation of pre-tax income multiplied by the statutory tax rate to the current tax expense, whereas FRS 102 requires a reconciliation to total tax expense from continuing operations. Under this approach, the effect of timing differences would generally not be reconciling items. This is consistent with IAS 12.
  • Disclosure of deferred tax: Similar to FRS 19, deferred tax liabilities are presented within provisions, and deferred tax assets within debtors. There is no requirement in Section 29 as in FRS 19 to provide a roll-forward of prior year balances; however, the section on ‘provisions’ does.
  • Additional disclosures required now include adjustments to deferred tax for changes in tax status, changes in accounting policies and material errors.
  • To assist readers in understanding future cash flows, there is a new requirement to disclose an estimate of the amount of net reversals of deferred tax assets and liabilities expected to occur during the following year.

Transitioning to FRS 102

The mandatory effective date for FRS 102 is for accounting periods beginning on or after 1 January 2015 (with an opening balance sheet as of 1 January 2014). Early adoption is permitted for periods ending on or after 31 December 2012.

Transition to FRS 102 is retrospective: that is, the opening balance sheet and comparative periods presented should reflect balances as if the FRS 102 had always been applied. Where a retrospective application would appear impossible, Section 35 Transition to This FRS potentially provides some relief. There is a general exemption from retrospective application when it would be impracticable, although disclosure would be required. What this means in practice will likely depend on the sophistication of the organisation, and the reasons for which the entity believes it is impracticable to apply Section 29 retrospectively.


The transition to accounting for income taxes under the ‘new’ UK GAAP might not be as daunting as it may seem at first glance. If your organisation adopts FRS 102, then new or different information may need to be collected, requiring a well thought out plan to affect this change; this should include identifying which differences will impact your organisation and what new data needs to be collected, as well as creating procedures to gather this data. This will likely require updating tax reporting templates to calculate any new deferred tax assets/liabilities, and to generate updated disclosures. Good luck!