Deferred tax: the potential options

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Steven Collings
Audit and Technical Partner
Leavitt Walmsley Associates Ltd
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One of the tasks faced by the Accounting Standards Board (ASB) in their convergence to an international-based financial reporting framework, notably the Financial Reporting Standard for Mid-Sized Entities (FRSME) is the issue of simplification in certain areas, in particular the revaluation of non-current (fixed) assets, leasing and deferred taxation.

This article looks at the general concept of deferred tax and the options that could be available to the ASB in their quest for simplification.

Deferred tax is probably one of the most disliked concepts by accountants, and probably one of the most confusing for their clients. As accountants are aware, the objective of deferred tax is to iron out the tax inequalities arising as a result of timing differences. For example, in years when corporation tax is saved by timing differences such as accelerated capital allowances, a deferred tax liability is set up in the balance sheet which essentially reverses as and when the timing difference reverse.

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23rd May 2011 14:48

Deferred tax

What is the difference between IAS 12 and FRS 19, as far as I can see timing differences and temporary differences are the same thing.  I would have calculated the deferred tax in the IAS 12 example in exactly the same way if I was doing a FRS 19 calculation.

Please would Steve Collings clarify this.


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23rd May 2011 16:04

Temporary Differences


The illustration above was intended to show how the IFRS based method would work based on the approach our FRS 19 takes and IFRS(SME) (FRSME).  Essentially FRS 19 focuses on timing differences between taxable profit and accounting profit (i.e. a P&L approach).  IAS 12 (which is where FRSME concept for deferred tax is based) takes a balance sheet approach based on temporary differences, which are based on the differences between the tax base of an asset/liability and the carrying amount in the balance sheet. Essentially all timing differences are temporary differences, but some temporary differences will not give rise to a timing difference.  Fixed asset revaluations are the most obvious that immediately spring to mind.  Currently FRSME does prohibit revaluation of assets (though this is something else which I suspect will change) but IAS 16 does allow revaluations so if we work on the basis that revaluations will be allowed.

Under FRS 19 the revaluation of (say) a building, which the company isn't planning to sell, won't give rise to a tax liability and therefore no deferred tax is bothered with.  However, when there is a binding agreement to sell the building and the gain/loss on sale has been recognised in the accounts then you would recognise deferred tax on the timing difference. 

The difference in IAS12/IFRSSME and FRSME (in its current form) is that a temporary difference would be recognised when the building is revalued - there does not have to be a binding sale agreement, so you would recognise a taxable difference even if the company isn't planning to sell the building (or any other asset subject to the revaluation model). 

Best regards


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23rd May 2011 18:43

Hard work
I've heard from various sources that this proposed method will cause deferred tax nightmares if it isn't changed because of the different approach. I just hope they do simplify it as our job is hard enough but time will tell no doubt.

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23rd May 2011 22:05

Temporary Differences


Thanks for clarifying and taking the time to respond.


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