FRS 102 and tax

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FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland is now tightening its grip on small companies that are mandatorily required to prepare their financial statements under the standard for accounting periods starting on or after 1 January 2016 (i.e. December 2016 year-ends will be the first ones prepared under the regime if the company has not already early-adopted FRS 102).

The standard has to be applied retrospectively to the date of transition and hence an opening FRS 102 balance sheet has to be prepared and the prior year financial statements also restated so that the comparative amounts are compliant with FRS 102.  Transitional and prior year adjustments will arise due to changes in the client’s accounting policies to align them with the requirements of FRS 102 or because additional items have to be recognised/derecognised to comply with the requirements of the standard.

Adjustments made to previously approved financial statements may have certain tax consequences that need to be considered.  For example, the need to provide for unpaid holiday pay accruals under FRS 102 which, for tax purposes, would be treated in line with the treatment of unpaid remuneration which is dealt with at Part 20 Chapter 1 CTA 2009.  Some accounting treatments which differ in FRS 102, as opposed to previous UK GAAP, will not have any consequential tax implications, such as the accounting treatment of fair value gains and losses reported in profit or loss for investment properties as the disposal of an investment property will usually give rise to a chargeable gain.  Such fair value gains and losses are ignored for the purposes of calculating profits chargeable to corporation tax.

HMRC overview papers

On 15 December 2016, HMRC issued two updated overview papers.  One paper relates to the corporation tax implications of FRS 102 and the other relates to the income tax implications.

The updated version of the corporation tax overview paper includes:

  • additional commentary in relation to non-interest bearing loans;
  • updated commentary on the application of the Disregard Regulations and Change of Accounting Practice Regulations as changes were made to these statutory instruments in December 2014;
  • additional commentary in respect of amendments made to FRS 102 that were issued in August 2014 and July 2015; and
  • commentary which is specific to Section 1A Small Entities in FRS 102.

The corporation tax overview paper does not reflect:

  • amendments made to FRS 102 in February 2015 in respect of pension obligations;
  • FRS 104 Interim Financial Reporting; and
  • the proposed changes to the tax rules, for example changes to the loan relationship and derivative contract rules and changes to the intangibles legislation included in Finance (No. 2) Act 2015.

There have been some significant changes in accounting treatments within FRS 102 when compared to previous UK GAAP.  For example, the requirement to recognise derivative financial instruments on the balance sheet in addition to other significant changes in respect of financial instruments generally, the treatment of fair value gains and losses on investment properties and the additional performance method of grant recognition.  It is important that practitioners understand the technical requirements of FRS 102, particularly the differences between old UK GAAP and new UK GAAP, because the corporation tax overview paper acknowledges that the corporation tax treatment for companies relies heavily on the accounting treatment adopted in the financial statements.  It is possible that any incorrect accounting treatment may lead to the incorrect treatment for tax purposes.

HMRC confirm that the guidance contained in the overview paper is only of a general nature and companies should not rely on the commentary in isolation.  In complex cases, it is always advisable to seek specialist advice to avoid any complications/challenges further down the line.

The corporation tax overview paper is available free of charge by clicking on this link.

Income tax implications

Also on 15 December 2016, HMRC issued an overview paper specific to unincorporated entities.  This overview paper concentrates on the income tax position for individuals, partnerships and non-resident companies that fall within the charge to income tax.  This overview paper acknowledges that not all of these businesses are required to prepare accounts, but all are required to calculate the profits of their business in accordance with GAAP (which includes FRS 102); the exception being those businesses which are using the cash basis of accounting.

The income tax overview paper is available free of charge by clicking on this link.

Deferred tax

At the outset it is worth flagging up that micro-entities that choose to apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime are prohibited from accounting for deferred tax.  This is because the statutory formats and the lack of disclosures would make it impossible to distinguish between tax that is current and tax that is deferred; hence, the Corporate Reporting Council at the Financial Reporting Council took the decision to prohibit deferred tax for micro-entities.  The Corporate Reporting Council also acknowledged that deferred tax is a complex area of accounting and as the micro-entities’ framework is the least complex in the suite of standards, it would be inappropriate to expect micro-entities to account for deferred tax.  On transition, all amounts of deferred tax are reversed, as are any remaining amounts in respect of the comparative year-end.

For small companies upwards, the scope of deferred tax is wider than under the FRSSE and FRS 19 Deferred tax.  There are three additional situations giving rise to deferred tax which relate to:

  • revaluations of non-monetary assets (e.g. tangible fixed assets and investment property);
  • fair values in business combinations; and
  • unremitted earnings in overseas subsidiaries, associates, branches or interests in joint ventures.

For most small companies transitioning to FRS 102 for 2016/17 year-ends, it is likely that revaluations of non-monetary assets will be the main area where additional amounts of deferred tax are to be recognised.  This includes recognising amounts of deferred tax in respect of fair value gains and losses taken to profit or loss in respect of investment properties.  Under previous UK GAAP, such amounts were not recognised unless, at the balance sheet date, the client had a binding agreement to sell the asset that had been revalued and the disposal had been recognised in the accounts.  The change in FRS 102 is in recognition of the fact that Section 29 Income Tax uses the timing difference ‘plus’ approach to deferred tax, rather than the timing difference approach that the FRSSE and FRS 19 took.


While the guidance issued by HMRC is not exhaustive, it does offer a starting point in considering the consequential tax effects of the transition to FRS 102.  However, care does need to be taken to understand the areas of the client’s financial statements that have been hit the hardest in terms of changes in accounting treatment.  Key areas to consider include (but are not limited to):

  • financial instruments;
  • short-term employee benefits accrued by the balance sheet date but not paid until after the year-end;
  • investment property fair value gains and losses;
  • tangible fixed assets (e.g. major spare parts/standby equipment); and
  • errors (material errors are corrected by way of a prior year adjustment in FRS 102; only fundamental errors were corrected this way in previous UK GAAP).


Category: Accounting and standards, Audit

About the Author ()

Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd and the author of 'Interpretation and Application of International Standards on Auditing'. He is also the author of 'IFRS For Dummies' and 'The AccountingWEB Guide to IFRS'. More about Steve's publications can be found by clicking on the 'Published Work' tab on the homepage. Steve is also a regular contributor of articles to www.accountingweb.co.uk, the UK's largest resource for professional accountants on a free subscription basis and is a member of the Society of Authors. Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. In 2011 Steve was named 'Accounting Technician of the Year' at the British Accountancy Awards and won 'Outstanding Contribution to the Accountancy Profession' by the Association of International Accountants in 2013. Follow Steve on Twitter - @stecollings

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