Deferred Tax

Deferred Tax

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I need to calculate deferred tax in a set of completion accounts wherby the shares of the company have been sold. However as part of the SPA it stated that Balance Sheet should not be worth less than £200K to protect the buyer but the buyer to agree to re-value the fixed assets from NBV to £25k.

FRS 19 states "9.4 Deferred tax shall be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date; however, deferred tax shall not be recognised on:

(a)revaluation gains and losses unless, by the balance sheet date, the entity has entered into a binding agreement to sell the asset and has revalued the asset to the selling price;

Therefore as it is only the shares sold can I still use NBV to calculate Deferred tax.

Many thanks
T

Replies (7)

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By johngroganjga
28th Feb 2014 10:14

Yes that's right.

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Replying to dianarose:
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By TinaPrice
28th Feb 2014 10:23

Deferred Tax
Thanks John. Buyer's Accountants were stating that Valuation amount should be used in the calculation, but my arguement is that the assets have not been sold and still remain with the company,
Thanks

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By johngroganjga
28th Feb 2014 10:29

Your retort should be that the revaluation is not a timing difference (obviously it will never attract capital allowances).

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Stepurhan
By stepurhan
28th Feb 2014 10:34

Details on fixed assets

You say they are to be revalued from NBV to £25k, but you don't indicate what the NBV is now. What is the NBV?

Why are they to be revalued at £25k? Is it a simple revaluation, or is it a recognition of impairment? Why is the buyer rather than the vendor the one agreeing the revaluation, when the buyer requires the balance sheet level?

Are you saying the figures are so marginal, that a movement in the deferred tax provision can make the difference between meeting and failing the test? Can you give any figures on the sensitivity on that?

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By User deleted
28th Feb 2014 10:35

What does the SPA say?

On how the Completion Accounts are to be prepared? It is normally the case that such accounts are to be completed using the same principles etc (ie GAAP) adopted for the statutory accounts. But not necessarily - conceivably, the SPA could specifically provide that deferred tax on revaluation gains is to be recognised when determining NAV. Unlikely, but lawyers have a nasty habit of trying to sneak things into SPAs, which is why a thorough review is required and no matter how many you've seen nothing should be taken for granted. 

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By Wayne Glenton
28th Feb 2014 10:39

Need more info

I think we need more information, what is it that you are asking, use NBV for what? The accelerated capital allowances calculation, NBV vs TWDV?

Part (a) above in FRS19 refers to the one situation where deferred tax on reval is ok, and that is for example if you have a big credit in the STRGL because you valued your property/assets up, AND that value is determined by a contracted sale after the balance sheet date, so you know that credit represents a real profit / timing difference, and you end up putting through a deferred tax charge / liability to bring the tax liability in to the period in advance of it's realisation in the next one.  (Next period you will pay CGT/CT, and your deferred tax created this period will cancel the payment off in the next).

This does not seem to be you, and should be confused / combined with what I think you may be after.

I think what you seem to be getting at is something seperate, and that is the calculation of the accelerated capital allowances element of deferred tax, which is often calculated by comparing NBV to TWDV, and then a proof prepared to show that the movement is equal to the difference between the depreciation charge / loss on disposal and the capital allowances claimed.

For this, yes it is appropriate to use the new NBV to calculate this, as the NBV is really just saying how much in theory would I get for this stuff if I sold it now, i.e. this is the anticipated proceeds for the purposes of deferred tax.

It is clear that your potential liability for tax (presuming it is that way around) from a purely balance sheet perspective, is that if you sold the equipment at the balance sheet date, and received the NBV in proceeds, you would then enter this in to the tax comp and compare to TWDV, to leave you with a balancing charge, at 20%.

The only problem after that is getting you depreciation / CA's proof to work but I will let you consider that one, as long as the balance sheet position is correct, you are usually pretty safe, and the proof is just a headache that works out eventually!

 

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By johngroganjga
28th Feb 2014 13:33

Not sure what all the above is about.  Revaluation is not a timing difference because it never enters into the capital allowance computations.  End of story surely as far as the ACA part of the deferred tax liability is concerned.

Whether deferred tax should be provided on a revaluation surplus is of course a different matter.

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