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Businesses should be readying themselves for the transition to the new UK GAAP. Here we look at the main tax changes that will arise. 

Overview

As things stand at the moment, entities are faced with quite a choice, when deciding which standard will be followed while preparing their accounts.

From 1 January 2015, the mandatory implementation date for new UK GAAP, small entities can choose to apply:

  • FRSSE 2015, or
  • FRS 101(qualifying group companies), or
  • FRS 102, or
  • full IFRS.

Those entities that do not qualify as small, have fewer options, but can still choose to apply:

  • FRS 101(qualifying group companies), or
  • FRS 102, or
  • Full IFRS. 

Tax changes

The transition to UK GAAP will bring with it some tax changes; the most significant of which are considered below:

First time adoption – accounting profits form the starting point for profits for tax purposes. Tax legislation stipulates that taxable profits are based on accounts prepared in accordance with GAAP. The legislation then provides adjustments for specific items, such as:

  • depreciation
  • loan relationships
  • disallowable expenditure.

As the changes to UK GAAP will have a direct effect on the reported profit, it will follow that this will impact on taxable profit. The differences to taxation will generally give rise to timing differences although the total taxable profits will be the same over the life of the business.

New UK GAAP applies for accounting periods beginning on or after 1 January 2015. As the comparatives under new UK GAAP need to be on a like-for-like basis, first time adoption of new UK GAAP will gives rise to a ‘prior period restatement’ in the accounts. This will mean that a tax adjustment is required and this adjustment is treated as a receipt / expense in the year of adoption.

Deferred tax – deferred tax under current UK GAAP is based on timing differences arising from the mismatch between the periods in which gains and losses are recognised in the financial statements and the period in which the tax effects arise. Under new UK GAAP, the approach will be similar but also requires deferred tax to be recognised on items such as the revaluation of property. Discounting of deferred tax balances is allowed in limited circumstances under current UK GAAP but is not permitted under new UK GAAP.

Investment property – current UK GAAP requires investment properties to be revalued each year to open market value. FRS 102 requires revaluation each year to fair value with any changes in value to be taken to profit and loss. Original cost less depreciation model may be used but only if fair value cannot be measured reliably without undue cost or effort. This is not permitted where the property is used by another group company. 

Foreign currency exchange – current UK GAAP allows transactions covered by a forward contract to be translated at the contract rate. This option is not permitted under FRS 102. Instead, a foreign exchange forward contract will be recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor will be retranslated at the year-end rate.

Intangible assets and goodwill – current UK GAAP allows an asset to be amortised over its useful life and, in most case, the amortising will be tax deductible. The maximum useful life under current UK GAAP is 20 years, although this can be rebutted if a longer or indefinite life can be justified. Under FRS 102, intangible assets and goodwill always have a finite life. If no reliable estimate can be made, the useful life will be presumed to be five years.

Lease accounting – leases will continue to be classified into finance leases and operating leases based on whether the lessor holds the risks and rewards of ownership. Under current UK GAAP, a lease is defined as a finance lease if the present value of the minimum lease payments is 90% or more of the fair value of the asset.

Under new UK GAAP, the 90% test disappears and is replaced with more qualitative tests, including where lease term covers major part (≥ 75%?) of asset life. Under new UK GAAP, there will be more chance of an asset qualifying as a finance lease.

A further change is where there are incentives for entering into a lease (e.g. a rent-free period), the value of the lease is spread over the period to the first rent review, being the point at which the rent is reset to market rates. Under new UK GAAP, lease incentives are spread over the full lease term, which may be a significantly longer time period.

Financial instruments – new UK GAAP classifies financial instruments into ‘basic’ and ‘other’. (Companies will also have the option of adopting the recognition and measurement criteria of full IFRS):

  • Basic instruments – cash, bank accounts, commercial paper and bills, debtors and loans receivable, loan commitments, some non-convertible preference shares and non-puttable ordinary shares). These will generally be measured at cost or amortised cost. Most receivables and payables that are classified as current assets or current liabilities will be measured at the undiscounted amount of cash expected to be paid or received.

Publically traded shares or where the share’s FV can be reliably measured are booked at FV with changes to P&L

  • Complex instruments – measured at fair value with changes generally taken to P&L (e.g. derivatives, investment in convertible debt).

Loan relationships and derivatives (e.g. bond holdings, loans and receivables, forwards, swaps and options) are taxable when an entry is made in P&L or ‘statement of comprehensive income’ (STRGL).

Shares are only taxed on disposal. Trading companies disposing of shares in other trading companies do not pay tax on such disposals if they owned ≥ 10% for (broadly) 12 months (substantial shareholder exemption). If the shares will be taxable on disposal, deferred tax must be recognised if they are fair valued via P&L.

Further support

ACCA has been active in helping practitioners ready themselves for the new UK GAAP.

We have a range of technical advice available in the UK GAAP section of our Technical Advisory website and a comprehensive technical factsheet available on the transition to the new GAAP.

Article contributed by ACCA