UK business embraces FRS19
FTSE companies are already looking at the effects of a new accounting standard on deferred tax and some intend to adopt it early, according to new research.
FRS19, accounting for deferred tax, replaces SSAP15 from 23 January 2002, and requires companies to account for their tax liabilities in full, which could result in a substantial drop in recorded earnings. SSAP15 required deferred tax to be provided for on a partial provision basis.
Of 40 FTSE-250 companies surveyed by PricewaterhouseCoopers, half have already quantified the effect on their results and nine plan to adopt the standard early. More than half of the companies surveyed figure in the FTSE-100.
However, PwC’s findings showed some misunderstanding of the standard’s requirements.
Three companies planning early adoption of the rule said their main reason was because FRS19 allowed them to recognise a deferred tax asset from brought forward tax losses. This is not allowed under SSAP15.
But in order to be recognised deferred tax assets must be ‘regarded as more likely than not that they will be recovered’.
For example if a company has a history of trading losses, there is strong evidence that there will be no future taxable profits against which the liabilities can be offset.
Peter Holgate, senior technical partner at PwC, said: ‘This result shows UK business misunderstands the requirements that must be met for recognition of an asset. The new standard does, at first glance, relax the evidence of recoverability required for recognition of a deferred tax asset.
‘But then specifically excludes brought forward trading losses from that relaxation. The key issue is evidence of recoverability of those deferred tax assets.’
The new standard however brings the UK closer to international standards and the US rule. This is one of the reasons some companies that are also listed in the US want to adopt early, said Holgate.
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