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FRS 19 Deferred Tax

FRS 19 Deferred Tax


I am preparing a 5 year business plan for a start up which is forecast to make substantial losses for the first two years, circa 1m in total.  In year three the business is expected to make a small profit, rising to £5m in year 5.  I understand under FRS 19 full provision should be made.  As the business will obviously roll the loss relief onto future periods, I considered building in a deferred tax debtor into the balance sheet and crediting the corporation tax in the P&L for the first loss making years and then reversing as the business gets relief,  however I dont think I should do that, given the deferred tax is coming from trading losses in a high risk start up, it would be misleading in my opinion to show a deferred tax asset which may not be recovered if the business failed?  Sorry if this is a stupid question, just not something I have had to consider before, any comments would be appreciated



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06th May 2011 10:08

In short...maybe.

Our partner always says 'be quick to recognise a DT asset and slow to recognise a DT liability' - this obviously makes sense, but I am never as comfortable with this as he seemed to be.

However, I believe FRS 19 states that the DT asset should be recognised if it is more likely than not that there will be suitable taxable profits in the future. There is also a section which mentions 'taking some time' for tax losses to be relieved which would suggest that recoverability would be relatively uncertain.

It would appear in your situation that recognition would not be appropriate at this stage, although this may change in time. However, if persuasive evidence of the future profitability exists, then the DT asset should be recognised.

In practice, I would expect many to take my partner's view and recognise but if we are being technically correct, this may not be appropriate.

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06th May 2011 10:22

It is only a plan

Business plans are not strictly subject to FRS19, but if you are preparing a 5 year business plan showing losses in the first two years which will be more than relieved by Year 5, it would be inconsistent not to include a deferred tax asset in the early years - assuming, of course, that this is a profit projection and not a cash flow forecast.

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