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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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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
29.5 Measurement of deferred tax on business combinations
29.5.1 Extract from FRS102: Section 29.11
29.11 When the amount that can be deducted for tax for an asset (other than goodwill) that is recognised in a business combination is less (more) than the value at which it is recognised, a deferred tax liability (asset) shall be recognised for the additional tax that will be paid (avoided) in respect of that difference. Similarly, a deferred tax asset (liability) shall be recognised for the additional tax that will be avoided (paid) because of a difference between the value at which a liability is recognised and the amount that will be assessed for tax. The amount attributed to goodwill shall be adjusted by the amount of deferred tax recognised.
29.5.2 OmniPro comment
Section 29.10 of FRS 102 makes it clear that deferred tax can only be recognised on permanent differences where they arise on a business combination as detailed in Section 29.11 of FRS 102. Section 29.11 of FRS 102 requires deferred tax to be recognised on all differences including permanent differences with the exception of goodwill between the fair value of the assets and liabilities at the date of acquisition and the carrying amount in the books of the acquiree. Note this only applies to business combinations. Note a group reconstruction is not a business combination so these rules would not apply to that situation. The deferred tax recognised increases goodwill where it is a deferred tax liability and decreases goodwill where there is a deferred tax asset.
When determining the tax rate to measure the timing difference at, consideration should be given to the rate in which the assets are likely to be realised i.e. at the CGT rate or the trading rate. The rate of deferred tax to use (i.e. the sales tax rate or the trading rate) depends on the expected manner of recovery of the asset or liability. Where the assets/liabilities are likely to be settled/used through use in the trade with little residual value, the trading rate enacted at the period end date should be used. Where it is likely the assets will be sold or there is a high residual value the sale tax rate should be used potentially. A deferred tax asset is only recognised where it is probable there will be future taxable cash flows to utilise the asset.
Sometimes it may be possible to recognise losses forward in the acquiree which were not recognised previously as there was doubt about future profits. However care needs to be taken when ascertaining whether these losses will be allowable in the future.
The deferred tax recognised is set against the goodwill figure as detailed in Section 29.11 of FRS 102 and illustrated below.
Example 34: Deferred tax on business combinations
Parent A acquired 100% of the ordinary shares of Company B for CU1,000,000. Assume the deferred tax rate is 10%. Assume deferred tax has been recognised correctly in the book amounts transferred. Details of the book value and fair value at the time of acquisition is detailed below:
| Book value | Fair value | |
| Property, Plant and Equipment | CU300,000 | CU550,000 |
| Intangible Assets | CUnil | CU100,000 |
| Inventory | CU150,000 | CU170,000 |
| Cash | CU100,000 | CU100,000 |
| Debtors | CU20,000 | CU25,000 |
| Creditors | (CU100,000) | (CU100,000) |
| Contingent Liabilities | CU- | (CU10,000) |
| Deferred Tax | (CU60,000) | (CU86,500*) |
| Total Net Assets | CU410,000 | CU748,500 |
| Consideration | CU1,000,000 | |
| Goodwill | CU251,500 |
The deferred tax to be recognised on acquisition is:
| Uplift in Property, Plant and Equipment | CU150,000 |
| Uplift in Intangible Assets | CU100,000 |
| Uplift in Inventory | CU20,000 |
| Uplift in Cash | CUNil |
| Uplift in Contingent Liabilities | (CU10,000) |
| Uplift in Debtors | CU5,000 |
| Uplift in Creditors | CUNil |
| Total Timing Difference | CU265,000 |
Once the above exercise is completed management should assess the rate that the asset/liabilities are expected to be reversed. Here the debtors, inventory, contingent liability property, plant and equipment are going to be reversed during trading as they are trading assets. In relation to the intangible assets, if it is assumed these will be used throughout the trade and have little residual value then the trading rate should be used in measuring the deferred tax. The deferred tax liability to recognise as a result of the uplift in value is:
CU265,000 * 10%= CU26,500. Therefore total deferred tax to be shown in the consolidated financial statements is = CU26,500+CU60,000=CU86,500
The journals required in the consolidated financial statements are:
| CU | CU | |
| Dr Goodwill | 251,500 | |
| Dr Net Assets of Company B | 748,500 | |
| Cr Investment in Company B in Parent Entity Balance Sheet | 1,000,000 |
From above it is evident that the additional liability for deferred tax has increased goodwill by the same amount. The deferred tax will be reduced as the differences reverses year on year (i.e. for PPE and intangibles in the period depreciation/amortisation is charged, for debtors when they are paid, for inventory when they are sold etc.). The deferred tax is reversed as depreciation/amortisation is charged and as the debtors/contingent liability is realised.
Note in the example above if there was a large residual value on the PPE, then it may be appropriate to recognise deferred tax at the sales rate for the value allocated to the residual amount and the remainder would be measured using the trading tax rate. This would then give a different answer for goodwill.
Example 35: Deferred tax on a business contribution where net assets as opposed to shares are acquired.
If we assume the company acquired the trade (net assets) as opposed to the shares in the above example deferred tax would be still required to be recognised. In the entity accounts as the fair value would be included on the balance sheet. The journals will be:
| CU | CU | |
| Dr Net Asset at Fair Value | 248,500 | |
| Dr Goodwill | 251,500 | |
| Cr Bank | 1,000,000 |
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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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