The Companies Act sets out certain minimum reporting requirements for companies and, for example, requires limited companies to file their accounts with the Registrar of Companies who makes them available to the general public. The Financial Reporting Standard for Smaller Entities will continue to be available for those that qualify to use it and will remain fundamentally unaltered for the time being. Together these standards make up what is commonly being referred to by accountants as new UK GAAP, which takes mandatory effect for accounting periods commencing on or after 1 January The main purpose is to make reporting requirements proportionate to the size of the entity, and it also includes changes to disclosure, measurement, and recognition.
Accounting standards of the IFRS and FASB - 1&1
Part of a series on. A fixed rate election must be made within 2 years of the end of the accounting period in which the expenditure was incurred and cannot be reversed. Also the tax rules changed in FRS 10 requires that software costs which are directly attributable to bringing an item of IT into use within the business are recognised as part of tangible fixed assets. In addition UITF 29 provides that, where certain criteria are met, website development costs are recognised as part of tangible fixed assets. Hence the nature of the item should be considered in determining its treatment.
This applies to all internally generated intangibles, including research and development. For Corporation Tax, in companies where costs on expenditure such as software have been previously written off to the profit and loss account and claimed as a deduction in a calculation of trade profit in respect of expenditure on a tangible asset, the following tax consequences would apply, if the software is in a future period accounted for instead as an intangible asset.
First the adjustment in respect of the change of accounting basis will be taxed under Chapter 14 Part 3 CTA For example, a positive adjustment is brought into account as a taxable receipt. BIM onwards has more guidance about computer software expenditure. Section 87 ITTOIA allows a deduction for certain research and development expenses of a revenue nature to a person carrying on a trade but not a profession or vocation. This also applies where a business is applying FRS The acquisition of a business is a capital expense for tax purposes. Tax law determines the value of trading stock for the business ceasing and its value for the successor business.
In respect of goodwill on business combinations please see section 8 of this paper. Once the lease has been classified the accounting treatment thereafter is also, generally, comparable. However differences, even where the classification is the same, do exist and the interaction with tax is noted below.
Section 15 of FRS requires that lease incentives are spread over the term of the lease on a straight line basis unless another way would better reflect the reality. Consequently there may be differences in respect of the period over which such incentives are recognised. Since the accounting is followed where the incentive is not capital for example, a rent free period the difference may alter the timing of income recognition for tax purposes. For lessors, FRS section 15 requires use of the net investment method for finance leases, whilst SSAP 21 requires the net cash investment method.
There may be differences in the timing of income recognition under the 2 bases. In some cases these affect the timing of income for tax purposes, for example where Schedule 12 Finance Act FA applies. For tax purposes the recognition and measurement of provisions in the accounts forms the basis for the quantum and timing of tax relief subject to adjustment where the expenditure is capital for tax purposes or otherwise disallowable.
In general, reporting of revenue in accounts is followed for tax purposes. However, Application note G of FRS 5 provides revenue recognition guidance in respect of the sale of goods and services as well as other specific revenue recognition scenarios, SSAP 9 provides guidance in respect of long term contracts and UITF 40 addresses service contracts. The general principles of revenue recognition within FRS 5 Application note G are that revenue is recognised when the seller obtains the right to consideration in exchange for the goods, services, or work performed.
The right to consideration typically derives from the performance of its obligations under the terms of the exchange with the customer. FRS 5 application note G requires that, on recognition, revenue is measured at the fair value of the consideration received or receivable. In FRS , revenue is measured at the amount receivable, net of trade discounts, prompt settlement discounts and volume rebates.
If payment is deferred beyond normal credit terms, the revenue recorded is equal to the cash price available on the transaction date. Where reasonable assurance is present grants are then recognised in the accounts based on the relationship between the grant and the related expenditure. It requires that a business adopts the accruals model to determine the subsequent accounting for the grant. Under the accruals model grants relating to revenue are recognised in income on a systematic basis over the periods in which the business recognises the relevant grant costs.
For tax purposes, grants which meet revenue expenditure, such as staff costs, are normally trading receipts for the entity, and this will continue where section 19 of FRS applies. FRS section 20 requires all borrowing costs to be expensed to profit or loss as they are incurred. Section 58 ITTOIA allows relief for certain incidental costs of obtaining finance which has been incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.
However, the costs of renegotiating the terms and conditions of loans or of getting out of a loan agreement are capital and not allowable for tax. In FRS section 21, equity settled transactions are not recognised until the shares are issued. Under FRS 20, a transaction is recognised when the goods or services are received, so companies which previously applied that standard to equity settled transactions will see a difference. For cash settled transactions, FRS section 21 requires the liability to be measured when goods or services are received by following the measurement rules in section 16 provisions and contingencies.
In FRS 20, the liability under a cash settled transaction is measured at fair value. In the FRSSE , the liability is measured at the best estimate of the expenditure required to settle the liability. In practical terms, this should be the same as under FRS Tax deductions in respect of share based payments are governed by specific legislation in Part 12 CTA for Corporation Tax.
Under section 23, for both defined benefit and defined contribution pension schemes, the business will record the cost of the benefits to which employees have become entitled as a result of their services in the period, as an expense. Under FRS 17, a business would recognise a net surplus asset or deficit liability by comparing the fair value of scheme assets with the scheme liabilities, and would recognise as expenses current service costs, interest costs and expected returns on assets.
FRS requires that when an employee has rendered services to a business during a period, any related holiday pay or similar is accrued for. The requirements of FRS section 7 are comparable. In addition the assets and liabilities of the intermediary will be accounted for by the sponsoring entity as an extension of its own business.
Generally a deduction is deferred until employment taxes are paid on the employee benefits. If a business has a foreign branch, FRS section 25 says that the business should refer to the requirements of FRS section 30 Foreign Currency Translation to determine if that foreign branch has a different functional currency. If it does, the business should apply the requirements of FRS section 30 to its transactions. Where a business covers a trading transaction with a forward contract, SSAP 20 states that the exchange rate specified by the forward contract may be used to record the transaction.
But in FRS section 25, a business must use the specified contract rate in a forward contract. A possible difference will arise for companies that previously have adopted FRS But under FRS , where a company enters into a transaction with a contracted exchange rate, the rate of exchange specified in that contract must be used. Accounts prepared in accordance with Old UK GAAP will apply the presentation and disclosure requirements of FRS 25 in respect of financial instruments and in particular liabilities and equity.
Whether a business sees a difference in how items are measured under FRS depends on whether they previously had adopted FRS 26 or not. However, businesses that had adopted FRS 26 will see differences in how FRS will require them to subsequently measure, for example, the debt component of a compound financial instrument. Guidance on the taxation of hybrid and compound instruments in both issuer and holder is available in the Corporate Finance Manual.
Part B of this paper has more information about the transitional provisions applying to hybrid instruments. FRS section 27 includes specific guidance on agricultural activities. This is not addressed within this paper. On transition FRS section 28 requires that the balance sheet presented in respect of the accounting transition date:. The transition date, for accounting purposes, is the first day of the earliest accounting period presented in the accounts. For example for entities preparing their accounts at 31 December the transition date will be 1 January FRS contains transitional exceptions and exemptions to the above requirements.
For Corporation Tax purposes, adjustments are treated as receipts or deductions when working out the trade or property business profits. BIM has details of the calculation.
These provisions apply only to companies within the charge to Corporation Tax. See section CTA Where such a difference arises and no section election has been made, section treats an increase as a taxable credit and a decrease as an allowable debit arising at the start of the later accounting period. The amount of the debit or credit is the difference multiplied by the fraction tax written down value or accounting value where both these values are those at the end of the earlier period.
Section 5 caps the amount of any credit to the net amount of previous debits on the asset less previous credits on the asset. Chapter 15 also contains different rules to deal with a change of policy involving disaggregation or where the asset is subject to a fixed-rate writing down election under section Adjustments on loan relationships as a result of changes in accounting policy can arise under 2 separate parts of the regime.
They are reflected as restatement of comparative figures if practicable , or as adjustments to the carrying amounts of assets and liabilities as at the beginning of the earliest practicable period with corresponding adjustments to the opening balance of the components of equity that are affected by the PPA. In these cases sections to CTA will apply.
These calculate the transitional adjustment by comparing the opening accounting value in the current accounting period with the closing accounting value for the previous accounting period. Accounting carrying value is defined to mean the carrying value of the asset or liability as shown in the balance sheet of the company subject to adjustments for specific tax provisions which have the effect of changing the carrying value for tax purposes for example, section CTA for connected party debt.
The derivative contract regime has equivalent rules in section and sections to CTA The overall effect in either case is to ensure that no amount should fall out of account as a result of a change in accounting policy. The Corporate Finance Manual, CFM onwards, has more details about the treatment of transitional adjustments for loan relationships and derivative contracts.
FRS 105 overview paper - tax implications
To help us improve GOV. It will take only 2 minutes to fill in. Skip to main content. Reporting financial performance 2. Consolidated accounts or separate financial statements, investments in associates and joint ventures 3. Accounting policies, estimates and errors 4. Inventories or stock 6. Property, plant and equipment 8.
Intangible assets including goodwill 9. Share based payments Foreign currency translation Liabilities and equity General trading 22 Intangibles Introduction The purpose of this overview paper is to assist companies and other businesses who are thinking of choosing or have already chosen to apply Financial Reporting Standard FRS The main section of this paper is split into 2 parts: Background Summary of the changes to the accounting standards There currently exists a suite of accounting standards in the UK.
Subject to certain restrictions detailed in the respective standards themselves, businesses may choose or may be required to prepare their accounts under one of the following: Generally accepted accountancy practice for corporation tax purposes is defined at section CTA and is: UK GAAP — generally accepted accountancy practice in relation to accounts of UK companies other than IAS accounts that are intended to give a true and fair view or in relation to a company that prepares IAS accounts means generally accepted accountancy practice in relation to IAS accounts Company accounts prepared in accordance with FRS are presumed in law to give a true and fair view.
The following table sets out the statements which are broadly equivalent. Tax position While the references and titles used in FRS are aligned to those used in IAS the tax statute has been updated to cover both sets of terminology. Accounting policies, estimates and errors Accounting for a change in accounting policy FRS 3, Reporting financial performance, requires that changes in accounting policy are applied retrospectively and that the cumulative effect of prior period adjustments PPA are presented at the foot of the STRGL.
Accounting for errors Where a fundamental error is identified, FRS 3 and the FRSSE require that this is accounted for by restating the prior period comparative figures. Examples of common financial instruments include cash trade debtors trade creditors bonds debt instruments derivatives Businesses applying Old UK GAAP fall into 2 main camps — those applying FRS 26 and those that do not. FRS FRS section 9 provides a business with specific guidance on accounting for all financial instruments. The following are indicators of whether borrowing is of a capital or revenue nature.
Capital borrowing will normally be: Revenue borrowing will be: Tax treatment For Corporation Tax, under general principles of the loan relationship regime, an amount of profit recognised to the profit and loss account would be brought into account. Tax treatment For Corporation Tax, the loan relationship would normally be taxed in line with the amount recognised in the accounts. Transition On transition section 28 of FRS provides that financial assets and liabilities derecognised under the previous accounting framework shall not be recognised on adoption of FRS Tax treatment For Corporation Tax, the loan relationship would normally be taxed in line with the accounts.
Transition Potentially this could result in a transitional adjustment. Tax treatment For Corporation Tax the loan relationship would normally be taxed in line with the accounts. Tax treatment Typically stock is measured for accounting purposes at the lower of cost and net realisable value and this is followed for tax purposes.
Tax treatment For Corporation Tax purposes sections to of Part 8 CTA provide a comprehensive set of rules for changes in accounting for intangibles.
UK GAAP: Eight main accounting standards
Tax treatment In general relief for Corporation Tax purposes is provided on either the amortisation or impairment of goodwill and intangibles recognised in the accounts. Software costs and research and development FRS 10 requires that software costs which are directly attributable to bringing an item of IT into use within the business are recognised as part of tangible fixed assets. Tax treatment For Corporation Tax, in companies where costs on expenditure such as software have been previously written off to the profit and loss account and claimed as a deduction in a calculation of trade profit in respect of expenditure on a tangible asset, the following tax consequences would apply, if the software is in a future period accounted for instead as an intangible asset.