Tax and FRS 102 – A Happy Marriage?

The Financial Reporting Council has given its approval to FRS102 which will form the cornerstone of UK GAAP from 2015 onwards. While this may hold a number of advantages there are a number of tax implications that one needs to be aware of. Here is just a sample of potential opportunities and threats to watch out for as identified by financial reporting support professionals.

Investment Properties

Where property assets are recognised at valuations in excess of their depreciated cost on transition day, FRS 102 stipulates that deferred tax on the difference is charged to the revaluation reserve. By increasing the total deferred tax provision on the balance sheet, this effectively reduces net assets and financial reporting support professionals believe this could well have an adverse effect on the security of loans and on banking covenants.

Tax Cash Flows

The natural inclination of many organisations may very well be to leave adoption of FRS102 until the mandatory effective date which is for accounting periods starting on or after January 1st 2015. However, businesses have the option to adopt the new standard before then and those working in financial reporting support believe this could well prove advantageous in certain scenarios from a tax cash flow point of view.

Some of the most complicated rules involve **financial instruments and derivatives **but, broadly speaking, changes in their fair value could have either a negative or positive effect on tax cash flow. The default position is that tax follows the accounts so that if the fair value of an instrument goes up, there will be a corresponding increase in tax and vice versa.

Finance directors might also wish to seek out financial reporting support where their companies have incurred **software costs. **Under FRS102 some of these may now be classified as intangible fixed assets which can be amortised leading to accelerated tax relief compared to the situation where they were previously classed as property, plant and equipment fixed assets and subject to relief via capital allowances.

Another group who might very well stand to benefit from improved cash flows where tax is concerned consists of those organisations which have benefited from **incentives on new leases. **FRS 102 allows lessees to spread the benefit of such incentives over the full term of the lease which is much more generous than what is required by existing UK GAAP. Again the tax situation follows the accounts so that taxes charged on such benefits are also extended over the full term of the lease thereby improving tax cash flow.

Finally, it seems that FRS 102 holds potential tax cash flow benefits for companies acquiring other entities whose intangible assets can be reliably valued. Since the cost of intangible assets including goodwill is normally amortised over an extended period, any such assets e.g. intellectual property, and research & development work in progress that have a shorter lifespan will now be amortised over this compressed period giving rise to additional tax cash flow advantages.

So it’s a mixed bag but to make sure that your company takes advantage of what FRS 102 offers it might help to consult with professionals in financial reporting support.

Whenever you decide to adopt FRS 102 you will need to give careful consideration to the areas of your business that could be affected. To find out more and to explore your options, visit Baker Tilly’s FRS 102 hub.

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