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Accountancy  •  Accounting standards  •  Business Services  •  Personal tax  •  Property

What are the key tax implications of new FRS 102 accounting standards?

By Michael Blay on 6 December, 2015

FRS 102 is a new single accounting standard for medium and large size UK businesses that replaces all earlier UK accounting standards. For more general information on FRS 102 refer to our earlier blog. The requirement to adopt the new FRS 102 reporting framework came into effect on 1st January 2015, which means most companies will soon begin preparing their accounts under the new regime. In addition, some of the changes to the accounting standards could have a bearing on the amount of corporation tax a company will have to pay in the coming year.

Key changes to accounting principles in FRS 102

Below are some of the key ways that the amount of tax suffered may change as a result of the changes under FRS 102:

  • If your company has intercompany payables or receivables any transitional adjustment required under FRS102 may be taxable / deductible;
  • For software costs, additional R&D tax credits may be available. For software accounted for as an intangible asset the tax deduction may be accelerated;
  • Operating lease incentives will now be released over the life of a lease, rather than up to the date of the first rent review. This is tax advantageous as the taxable income is spread over a longer period;
  • FRS102 specifically requires that a holiday pay accrual is provided where material. Tax relief remains available on any element that is paid within 9 months after the end of the accounting period.
  • In addition there are also notable changes in the way that deferred tax is calculated.

Investment property is tax neutral

One area where clients can be reassured that a change to the overall tax liability is unlikely under FRS 102, is with the treatment of investment property. As was the case under the previous accounting rules, according to FRS 102 investment property should be recognised at cost and subsequently measured at fair value (i.e. market value).However, with the abolition of the revaluation reserve, fair value movements are now to be recognised in the profit and loss account. HMRC have confirmed that any market value gains on investment property will remain subject to corporation tax when the property is disposed of. In addition, income arising from an investment property will continue to be brought into tax as it is accounted for, e.g. rental income. This means that there is no change to the way investment property is to be taxed under FRS 102.

Understanding the impact of FRS 102 on balance sheet values

The following example highlights how alterations to accounting principles within FRS 102 have an impact on a company’s balance sheet.

A business made a re-organisation provision of £1m in its Y1 accounts under a valid accounting policy for the accounting period. Under the same accounting policy, it would have provided a further £500,000 in its Y2 accounts. By the time the Y2 accounts were being prepared, a new financial reporting standard had come into force. Because the provision failed to satisfy the requirements of the new standard, the business cannot now make the further provision of £500,000 in Y2 and must now also remove the £1m from its balance sheet.

The provision is subsequently removed, which has the effect of enhancing shareholders’ and owners’ equity by increasing retained profits by the amount of the adjustment. The profit and loss from the previous year will be restated to provide accurate comparative figures. The Y1 accounts don’t need reopening because the accounting policy was valid when they were drawn up. However, if the re-organisation provision of £1m had been allowed for tax purposes, the prior period adjustment is taxable, resulting in an increased tax liability of £200,000 at a tax rate of 20%.

Plan ahead for the impact of FRS 102 on your tax liability

Depending on each company’s individual accounting situation, the change to FRS 102 may have tax consequences in that a company’s tax bill may be greater (or possibly lower) than expected. It’s therefore important for companies to be aware of these changes now, to avoid any unpleasant surprises further down the line.

HMRC has issued detailed guidance on the adoption of FRS 102, because as part of the transition, they will be concerned there has been no artificial manipulation of tax in the transition year. Our recommendation to clients is to get in touch if you think your company may be affected so you can either put money aside to cover forthcoming corporation tax liabilities or attempt to identify ways to mitigate the effects of the transition.

If you have concerns about the transition to FRS 102 and want to understand the tax implications please contact Michael Blay by emailing mb@rjp.co.uk.

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