Storyboard for

1. Income tax under FRS 102 Storyboard for

2. …clear thinking

3. By completing this module you will be able to: Identify key differences compared with existing UK Generally Accepted Accounting Principles Ensure that the first set of financial statements under FRS 102 are fully compliant with the new requirements Draft disclosures including those relating to accounting policies Identify issues arising on transition to FRS 102 At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: Paul Gee  Learning time: 15 minutes Income tax under FRS 102 Graphic: [presenter or standard graphic]

4. Tax is covered in section 29, compared with FRSs 16 and 19 under existing UK GAAP There are no significant differences regarding the treatment and presentation of current tax Deferred tax now requires a ‘timing difference plus’ approach timing differences as per FRS 19, but with additional requirement to provide for deferred tax on fixed asset revaluations (property, plant and equipment as well as investment properties) special considerations for calculating deferred tax on business combinations prohibition on discounting of deferred tax assets and liabilities Some different and tricky disclosure requirements compared with FRS 19 What is different compared with previous UK GAAP? Graphic: [a sign saying „new“]

5. Timing differences differences between taxable profits and total comprehensive income as stated in the financial statements arising from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements Permanent differences differences … other than timing differences Timing differences and permanent differences Graphic: [spring flowers, some in bud, some in bloom]

6. Accelerated capital allowances in respect of fixed (non-current) assets Tax losses Accrued pension liabilities subsequently granted tax relief when payment is made in a subsequent period Revaluations of property, plant and equipment Revaluations of investment properties Fair value adjustments arising in respect of business combinations Examples of timing differences Graphic: [an office block]

7. Recognise all timing differences apart from specified exceptions in paras 29.7 to 29.9 and 29.11 (see notes) Only recognise unrelieved tax losses and other deferred tax assets to the extent it is probable (= more likely than not) that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits Recognition of deferred tax Graphic: [a queue into a nightclub]

8. The existence of unrelieved tax losses is strong evidence that there may not be other future taxable profits against which the losses will be relieved All available evidence should be considered including: historical information about financial performance and position persuasive and reliable evidence to suggest that suitable taxable profits will be generated in future evidence that the tax losses result from an identifiable and non-recurring cause and the entity has otherwise been profitable over a long period Recognition of unrelieved tax losses Graphic: [bar chart showing fluctuating levels of a company‘s profit]

9. Para 29.11 requires a deferred tax liability (or asset) to be recognised when the amount that can be deducted for tax on an asset (other than goodwill) that is recognised in a business combination is less (or more) than the value at which it is recognised in the financial statements of the acquirer This is a tricky section – the full wording is reproduced in the notes to this module It is different from existing UK GAAP The comparison is best illustrated by an example, shown on the following screens Recognition of deferred tax - business combinations Graphic: [a 2 circle Venn diagram]

10. A Group acquires company B for cost of £1,000 B has an internally–generated intangible with a NBV at acquisition date of zero: B obtained tax relief on expenditure incurred in creating the intangible Fair value of the intangible at acquisition date is £140, and estimated useful life 5 years Fair value of other net assets is £700 Tax rate assumed at 23% For simplicity, ignore deferred tax on plant and machinery Example: Recognition of deferred tax - business combinations

11. Example: Business combinations

12. The intangible will be amortised over its useful life of 5 years at £28 p/a Goodwill of £192.20 will be amortised over its useful life which in the absence of a reliable estimate shall not exceed 5 years Deferred tax of £32.20 will be written back to profit or loss over the useful life of the intangible i.e. £6.44 will be credited to consolidated tax expense over each of the next 5 years Example: Recognition of deferred tax under FRS 102

13. Measure using tax rates and laws that have been enacted or substantially enacted by the reporting date that are expected to apply to the reversal of the timing differences, apart from specific cases relating to revalued fixed assets: for a revalued non-depreciable asset, use tax rates applicable to the sale of the asset for an investment property measured at fair value, use tax rates applicable to the sale of the asset, except for an investment property with a limited useful life and held within a business model whose objective is to consume substantially all of the economic benefits embodied in the property over time Discounting of current or deferred tax assets or liabilities is not permitted Measurement of deferred tax Graphic: [a measuring tape]

14. Changes in a current tax liability (asset) and changes in a deferred tax liability (asset) are to be treated as tax expense (income) with one exception relating to the initial recognition of a business combination The tax expense should be presented in the same component of comprehensive income (i.e. continuing or discontinued operations) or equity as the transaction or other event that resulted in the tax expense (income) Deferred tax liabilities should be presented within provisions for liabilities Deferred tax assets should be presented within debtors Section 29 contains strict requirements on offset of assets and liabilities Presentation in the financial statements Graphic: [FD making a results presentation]

15. Key disclosures are: Major components of the tax expense (tax income) including the amount of deferred tax expense relating to a change in tax rates Aggregate current tax and deferred tax relating to items that are recognised as items of other comprehensive income or equity A reconciliation between tax expense (income) and profit (loss) on ordinary activities before tax multiplied by the applicable tax rate see illustration on following screen Disclosure requirements Graphic: [megaphone]

16. Tax reconciliation note

17. Amount of net reversal of deferred tax assets and deferred tax liabilities expected to occur during the year beginning after the reporting period + a brief explanation for the expected reversal An explanation of changes in the applicable tax rate(s) compared with the previous reporting period Total amount and analysis by type of deferred tax assets and liabilities at end of year Amount of unused tax losses and tax credits at end of year Expiry date, if any, of timing differences, unused tax losses and unused tax credits Tax implications of dividend payments in particular jurisdictions Disclosure requirements Graphic: [a lorry reversing]

18. “… Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the reporting date and which will result in an obligation to pay more, or a right to pay less or to receive more tax. Provision is made for deferred tax on gains arising from the revaluation (and similar fair value adjustments) of fixed assets. Deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. …” Accounting policy illustration - taxes (part of note) Graphic: [fountain pen]

19. FRS 102 para 35.7(a) requires an entity to recognise in its opening statement of financial position as at transition date all assets and liabilities whose recognition is required by FRS 102 this would include deferred tax relating to assets included at fair value and deemed cost at transition date Any adjustment required should be recognised directly in retained earnings in accordance with FRS 102 para 35.8 Transition to FRS 102: Adjustments Graphic: [an adjustable spanner]

20. Changes in accounting policy on transition to FRS 102 may have deferred tax implications, requiring separate presentation in the reconciliations required by para 35.13 of FRS 102: Adjustment to equity at transition date Adjustment to equity at previous reporting date Adjustment to income for the previous reporting period Transition to FRS 102: Changes in accounting policy Graphic: [a chameleon]

21. The key things to remember from this module are: Deferred tax under FRS 102 is more extensive than that under FRS 19 and includes timing differences on the revaluation of property, plant and equipment Deferred tax also extends to fair value adjustments arising on acquisition in business combinations Deferred tax balances may not be discounted Disclosure requirements of FRS 102 differ in important respects compared with those under FRS 19 Care should be taken in drafting the accounting policy note HMRC has recently issued guidance which may be helpful in identifying both cash tax and deferred tax issues Summary Graphic: [standard summary graphic]

22. Web Ride

23. …clear thinking

24. Please select the correct answer(s) and then click on “Submit” Which of the following statements are true? Deferred tax must be recognised on surpluses on revaluation of property, plant and equipment FRS 102 does not require deferred tax to be provided on fair value adjustments arising from assets acquired in a business combination Deferred tax relating to investment property that does not have a limited useful life and which is held at fair value should be measured at tax rates that apply to the sale of the asset At transition date, FRS 102 does not require deferred tax to be provided in respect of assets where the entity has elected to use a previous revaluation as deemed cost Question 1

25. Please select the correct answer(s) and then click on “Submit” Which of the following statements are true? Deferred tax relating to items of other comprehensive income need not be separately presented Deferred tax relating to discontinued operations must be presented within that component of comprehensive income On transition to FRS 102, the effect of deferred tax on investment properties at fair value should be presented separately in the reconciliations adjustments to equity and profit for the year The amount of deferred tax expense relating to a change in tax rates should be presented as a movement in equity Question 2

26. Please select the correct answer(s) and then click on “Submit” Which of the following disclosures are required by FRS 102? The amount of the net reversal of deferred tax assets and deferred tax liabilities expected to occur during the year beginning after the reporting period A reconciliation of the current tax charge on ordinary activities for the period to the current tax charge that would result from applying a relevant standard rate of tax to the profit on ordinary activities before tax The amount of unused tax losses The impact of discounting on the deferred tax balance Question 3

27. Now you have finished this module and acquired basic knowledge on income tax under FRS 102 If you answered all the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]