IFRS update summer 2006 – tax alert

ifrs special

In association with PwC

We’ve been here before, issuing warnings about the effects of IFRS on your
corporate tax bill. Goodwill deductions and whether to impose IFRS
accounting at
entity level
have, in the past, thrown up tricky tax issues to grapple with
as the new accounting standards bed down.

Link: Access IFRS –
PwC’s IFRS resource centre

Now there’s another worth watching out for, which could really make a big
difference to your bill and it revolves around the bedrock element of IFRS ­
fair value accounting.

But let’s back track a bit to see the full story. It starts with an
observation about securitisation companies. These are special companies
established for the purpose of pooling the assets of an existing business so
they can be used as security for raising cash, usually to acquire other assets.

The money can be raised using bonds, shares or other securities. They can
even be used for raising the money to pay for assets which have been placed in
the company.

Under IFRS’s fair value accounting, however, it was noted that the value of
the assets in such vehicles could fluctuate wildly. In fact, the value could go
up by so much that it could give rise to a corporate tax charge. This would not
have happened if the special companies were accounted for under the old UK GAAP.

The government noted this and, for once, was sympathetic to the argument.
After all, if the securitisation companies suddenly ended up with a huge tax
bill, it seriously damages a very effective way of investing in new plant,
machinery ­ even property. In short, business investment could be seriously

But the government moved in the Finance Bill 2005, and measures were
introduced that allowed the special companies to be accounted for using UK GAAP.
This was the case even if the parent company was reporting using IFRS.

This applied for companies with accounting periods ending on 31 December 2004
(that is, UK GAAP) and for all periods of account beginning on or after 1
January 2005, and ending on or before 31 December 2006. This was then extended
this year to accounts ending on or before 31 December 2007.

Great, problem solved. But there is a twist, and one with some beneficial
consequences. The definition used in the legislation for a securitisation
company turned out to be pretty broad, so broad, in fact, that it was realised
that it would include companies that had issued debt, but not necessarily for
the purposes of securitisation.

So the government took a view. Based on the definition, it decided that those
companies that had issued more than £50m of debt, or were legally committed to
issuing debt, before 22 March 2006, could elect to be included in the temporary
tax regime, provided they matched the original definition.

PricewaterhouseCoopers tax partner, Gillian Wild, says: ‘The good news is
that the definition is potentially much broader than anyone had expected. The
result being that more securitisation vehicles than first thought could be
eligible for the UK GAAP tax accounting.’

But remember, this deal is a limited offer. It only applies for accounting
periods ending on or before the end of December next year so, as Wild points
out, a review will be needed to discover if you can use the legislation.

This is going to be tough because the definition, though broad, is also
extremely complex, not least because it hasn’t been drafted by tax experts, but
comes from the insolvency act. As a result, whether or not you can use the UK
GAAP accounting could be a fine judgement, but the option is there to be used.

Link: For the latest news and analysis on IFRS, updated every week, register
for Access IFRS –
IFRS resource centre

Related reading

Fiona Westwood of Smith and Williamson.