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Contents
29.2 Recognition and measurement of current tax.
29.2.1 Extract from FRS102: Section 29.3 – 29.5.
29.2.2.1 What tax rate to use.
29.2.2.1.1 Ireland and UK rules.
29.2.2.1.2 Impact of change in tax rate – substantively enacted just after year end.
29.2.2.1.3 Change in rate during the year.
29.2.2.2 Uncertain tax positions.
29.2.2.2.2 Assessing whether a provision is required.
29.2.2.3 Interest charged on late payment of taxes.
29.2.2.5 Adjustments in respect of prior years.
26.2.2.6 Recognition of current tax asset.
29.2.2.6.1 Tax paid in excess of tax charge for current and previous periods.
29.2.2.6.2 Tax losses set back to prior periods.
29.2.2.7 Allocation of the tax expense.
29.3 Provision for close company surcharge.
29.3.1 Extract from FRS 102 Section 29.14.
29.4 Recognition of deferred tax.
29.4.1 Extract from FRS102: Section 29.6–29.17.
29.4.2.1 Deferred tax defined and the purpose of deferred tax.
29.4.2.2 Permanent differences.
29.4.2.2.1.1 The one exception for recognising a permanent difference for deferred tax.
29.4.2.3 Temporary differences.
29.4.2.3.1 Temporary differences defined.
29.4.2.3.2 Definition of deferred tax assets and instances where they arise.
29.4.2.3.2.1 When does a deferred tax asset exist including examples.
29.4.2.3.3 Definition of deferred tax liabilities and instances where they arise.
29.4.2.3.3.1 When does a deferred tax liability exist including examples.
29.4.2.3.4 Recognition of timing differences – the rules.
29.4.2.3.4.1 Unrelieved tax losses – The rule recognition or not.
29.4.2.3.4.4 No recognition of timing difference on goodwill recognised in a business combination.
29.4.2.4.0 Initial recognition exception.
29.4.2.4.1 What tax rate to use.
29.4.2.4.1.1 The rate to use for non- depreciable land and investment property.
29.4.2.4.1.2 Review of the recovery of how a deferred tax asset/liability is recovered/settled.
29.4.2.4.1.2.1 Manner of recovery through use.
29.4.2.4.1.2.2 Manner of recovery through sale.
29.4.2.4.1.2.3 Manner of recovery – dual use.
29.4.2.4.1.3 Effect of change in classification of assets.
29.4.2.4.1.4 Determining the value of timing difference.
29.4.2.4.1.4.2 Indexation and how is this accounted for.
29.4.2.4.1.6 Deferred tax impact if unlikely to be taxable/tax deductible on future sale.
29.4.2.4.1.7 Steps involved to working out deferred tax.
29.4.2.4.1.8 Some examples of timing differences.
29.4.2.4.1.8.1.2 Steps to calculate deferred tax for fixed asset timing differences.
29.4.2.4.1.8.1.3 Application of deferred tax to fixed assets.
29.4.2.4.1.8.1.3.1 Deferred tax allowable for tax and depreciable.
29.4.2.4.1.8.1.3.2 Asset allowable for tax, depreciable and revalued.
29.4.2.4.1.8.1.3.3.1 Treatment of depreciation on upward revaluation.
29.4.2.4.1.8.2 Accounting for deferred tax on non-depreciable land.
29.4.2.4.1.8.3 Deferred tax on investment properties carried at fair value.
29.4.2.4.1.8.4 Pension contributions/royalty charges.
29.4.2.4.1.8.5 Finance leases.
29.4.2.4.1.8.6 Unrelieved tax losses.
29.4.2.4.1.8.6.1 Ability to recognise unutilised losses against other deferred tax liabilities.
29.4.2.4.1.8.7 Fair value adjustments.
29.4.2.4.1.8.7.1 Further exampls of deferred tax where fair value adjustments are recognised.
29.4.2.4.1.8.7.1.1 Non-puttable ordinary shares and deferred tax.
29.4.2.4.1.8.7.1.2 Interest rate swaps – derivatives and deferred tax.
29.4.2.4.1.8.7.1.3 Forward foreign currency contract and deferred tax.
29.4.2.4.1.8.8 Defined benefit obligations.
29.4.2.4.1.8.9 Consolidation adjustments.
29.4.2.4.1.8.10 Investment in associates, joint ventures, subsidiaries in consolidated accounts.
29.42.4.1.8.11 Assets partly allowable for tax purposes.
29.4.2.4.1.8.12 Items expensed which are capital in nature (allowable for capital allowances).
29.4.2.4.1.8.13 Transition adjustments to a new GAAP.
29.5 Measurement of deferred tax on business combinations.
29.5.1 Extract from FRS102: Section 29.11.
29.6 Withholding tax on dividends.
29.6.1 Extract from FRS102: Section 29.18-29.19.
29.7.1 Extract from FRS102: Section 29.24-29.24A.
29.7.2.1 Off setting current tax.
29.7.2.2 Offsetting deferred tax assets and liabilities.
29.8 Value Added Tax (“VAT”) and other similar taxes.
29.8.1 Extract from FRS 102: Section 29.20.
29.9 Presentation and disclosures.
29.9.1 Extract from FRS102: Section 29.21-29.27.
29.9.2.1.1 Where to recognise the tax charge/credits in the statements of comprehensive income.
29.9.2.1.2 Where to recognise the tax asset or liability on the balance sheet.
29.9.2.2.2 Accounting Policies.
29.9.2.2.3 Notes to the financial statements.
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29.2 Recognition and Measurement of Current Tax
29.2.1 Extract from FRS102: Section 29.3 – 29.5
29.3 An entity shall recognise a current tax liability for tax payable on taxable profit for the current and past periods. If the amount of tax paid for the current and past periods exceeds the amount of tax payable for those periods, the entity shall recognise the excess as a current tax asset.
29.4 An entity shall recognise a current tax asset for the benefit of a tax loss that can be carried back to recover tax paid in a previous period.
29.5 An entity shall measure a current tax liability (asset) at the amount of tax it expects to pay (recover) using the tax rates and laws that have been enacted or substantively enacted by the reporting date.
29.2.2 OmniPro comment
29.2.2.1 What tax rate to use
The tax rate to be used in the financial statement is the tax rate that applies to the period under review that has substantively been enacted by the balance sheet date as detailed in section 29.5 of FRS 102. A substantial enactment occurs where the country has included it in legislation.
If the tax rate is not enacted until after the reporting period, then this rate cannot be used. The rate in force during the year should be used.
29.2.2.1.1 Ireland and UK rules
Appendix I of FRS 102 states that a Republic of Ireland tax rate can be regarded as having been substantively enacted if it is included in the Bill that has been passed by the Dail. It is deemed substantively enacted in the UK if a Bill has been passed by the House of Commons and is awaiting only a passage of time through the House of Lords and Royal Assent.
29.2.2.1.2 Impact of change in tax rate – substantively enacted just after year end
Example 1: Impact of change in tax rate – substantively enacted just after year end
Company A operates in Ireland. During the year the government announced in the budget that the tax rate would change to 10%. The company year-end is 31 December 2014. The tax rate is not substantively enacted by the government until 10 January 2015. The tax rate prior to this was 15%. At the year end 31 December 2014, the company should calculate its tax at the 15% rate.
Deferred tax should also be measured at the tax rate of 15%. In effect it is a non-adjusting post balance sheet event. The fact that the rates changed and the deferred tax impact of the change in rate from 15% to 10% should be disclosed in a note to the financial statements.
29.2.2.1.3 Change in rate during the year
Example 2: Change in rate during the year
Company A’s year end is 31 December. The tax rate for the first 3 months of the year was 20% and the tax rate for the remaining 9 months was 10%. The tax rate that should be used for computing taxable profits should be the weighted average of these rates.
Tax rate of 20% for 3 months = 20%/12mths*3mths = 5%
Tax rate of 10% for 9 months = 10%/12mths*9mths = 7.5%
Total average rate to be used in the financial statements 12.5%
If the profits are earned somewhat evenly during the year, then the tax rate of 12.5% can be used in the tax computation.
29.2.2.2 Uncertain tax positions
29.2.2.2.1 Analysis
FRS 102, Section 29 does not specifically deal with uncertain tax positions which can be common issues in entities. Section 21 of FRS 102 specifically scopes Section 29 out of its scope. Section 10.4 and 10.5 of FRS 102 makes it clear that entity’s management should use its judgement in developing and applying an appropriate accounting policy and it can review other sections in determining the policy to take. It may be usual to either apply a weighted average possibility or a best estimate. The policy chosen should be consistently applied.
An entity should also assess whether the uncertain tax positions should be looked at collectively or individually, which again will be an accounting policy choice which should be applied consistently.
29.2.2.2.2 Assessing whether a provision is required
When assessing whether a provision is required an assessment has to be made as to whether it is probable that the entity will be able to defend the position it has taken. Where it is not probable then a disclosure is required, where it is probable it can be defended then no provision is required. In effect an entity will usually look to the definition of a provision and contingent liability in Section 21 of FRS 102 (see 21.6.2.2 and 21.7.2.1) as to whether a provision is required. Where it is not probable, a decision has to be made as to whether a disclosure is required.
29.2.2.3 Interest charged on late payment of taxes
If interest is charged by the tax authorities FRS 102, is not clear on where this should be posted. Given that it is not tax, it is likely appropriate for this to be included in the interest and expenses section of the profit and loss. However, this is not set in stone and will require judgement. Disclosure should be included in the accounting policy note explaining where interest and penalties are posted. There may be a stronger argument for penalties to be posted to the tax line.
29.2.2.4 Discounting
Current and deferred tax cannot be discounted as stated in section 29.17 of FRS 102.
29.2.2.5 Adjustments in respect of prior years
In determining the current tax charge for the year, the financial statements may be signed off before the corporation tax computation is submitted. Therefore there are likely to be estimates included. It is common practice for the difference between the tax computation submitted and the amount included in the accounts to be adjusted prospectively as a change in accounting estimate assuming there as not a material error in the tax computation (i.e. it was actually a change in estimate).
It is usually included in a line in the tax note stating ‘adjustment in respect of prior years’. However, care should be taken to assess whether it was in fact due to a change in estimate or it was due to an error. This is not always clear cut. If an incorrect tax rate was used, obviously this was an error and if material a prior year restatement would be required under Section 10 of FRS 102 (see 10.9.2 in section 10). If it is considered to be a change in estimate, then as per Section 10, disclosure of the reason for the change in estimate should be disclosed as well as the effect on the current year’s financial statements (see 10.8.2 of section 10).
A similar exercise would be performed for deferred tax as above.
26.2.2.6 Recognition of current tax asset
29.2.2.6.1 Tax paid in excess of tax charge for current and previous periods
As per section 29.3 of FRS 102 a current tax asset should be recognised where the preliminary tax paid is in excess of the corporation tax charge for the year.
29.2.2.6.2 Tax losses set back to prior periods
A current tax asset can also be recognised where losses were made in the year for tax purposes as the losses can be carried back to the previous year of the same length as detailed in section 29.4 of FRS 102. If an entity decides not to carry back losses, then deferred tax should be recognised on these losses unless they are not deemed recoverable.
Example 3: Carry back of losses
Company A incurred losses of CU100,000 in the year which are all allowable for tax purposes. In the previous year the company had taxable trading profits of CU150,000 and paid tax at 10% so tax of CU15,000 was paid on this income. Therefore the losses in the current year of CU100,000 can be offset against the taxable trading in the prior year of CU150,000 which leaves CU50,000 taxable in the prior year. Assuming the prior year tax has been paid, the company can recognise a current tax asset for the CU10,000 (CU100,000*10%) refundable from the tax authorities. Note in the tax note in the financial statements there would be a line to say ‘set back of losses to the previous year’. If there was CU200,000 losses in this example the remaining CU5,000 (CU50,000*10%) could be recognised as a deferred tax asset if is probable future profits will be available to utilise this loss.
29.2.2.7 Allocation of the tax expense
Section 29.22 of FRS 102 makes it clear that the tax expense follows the accounting treatment for the transaction. Therefore, where share costs are incurred on issue of shares, the tax deduction is posted to equity. See Section 22.9 of FRS 102 for further details.
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Examples
Example 1: Impact of change in tax rate – substantively enacted just after year end.
Example 2: Change in rate during the year.
Example 3: Carry back of losses.
Example 4: Close company surcharge.
Example 5: Close company surcharge – no distributable reserves.
Example 6: Losses forward – recognition of deferred tax.
Example 7: Deferred tax liabilities available to utilise deferred tax assets.
Example 8: Conditions for retaining tax allowances have been met.
Example 9: Dual use manner of recovery.
Example 10: Indexation of base cost – non depreciable asset.
Example 11: Allowable for tax and depreciable.
Example 12: Asset allowable for tax, depreciable and revalued.
Example 14: Transfer of depreciation on revalued amount from profit and loss reserves.
Example 16: Fair value movements and deferred tax impact.
Example 18: Pensions/royalties.
Example 19: Pensions/royalties.
Example 21: Non-puttable ordinary shares and deffered tax.
Example 22: Interest rate swaps – derivatives and deffered tax.
Example 23: Forward foreign currency contract and deffered tax.
Example 27: Defined benefit obligations.
Example 29: Deferred tax on net defined benefit asset/liability.
Example 30: Recognising deferred tax.
Example 31: Deferred tax on consolidated adjustments – elimination of profit from inventory.
Example 32: Undistributed profits of a subsidiary.
Example 33: Assets partly allowable for tax purposes.
Example 34: Deferred tax on business combinations.
Example 36: Dividend received.
Example 37: Offset of current tax assets and liabilities.
Example 38: Offset of current tax assets and liabilities.
Example 39: Offset of current tax assets and liabilities.
Example 40: Offset of deferred tax assets and liabilities.
Example 41: Extract from the accounting policy note and notes to the financial statements.
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