The publication of a revised accounting standard on deferred tax will require companies to account for their tax liabilities in full which may result in a considerable drop in recorded earnings.
FRS 19 ‘Deferred Tax’ replaces SSAP 15 viewed by many in the industry to be satisfactory in the current climate. SSAP 15 ‘Accounting for deferred tax’, required deferred tax to be provided for on a partial provision basis. Despite Sir David’s determination to get the standard out before he departs, as a peace offering the implementation of FRS 19 has been delayed until January 2002.
The Accounting Standards Board said it went ahead with the update, despite initial opposition, because it brings the UK closer to the international method. In fact FRS 19 goes a step further because the ASB claims IAS 12 leads companies to make excessive provisions.
In his book The Convergence Handbook, former secretary general of the International Accounting Standards Committee David Cairns challenged the IASC to alter IAS 12.
He said: ‘UK companies will not be allowed to comply with FRS 19 on deferred taxes if they are required to comply with IAS.’
‘The approach adopted in FRS 19 is superior to that adopted in the international standard,’ Cairns added.
And it is expected that Sir David will respond in his new role as board chairman of the IASC, and revise IAS 12 to bring it into line with his preferred method of full provision accounting for tax liabilities.
In contrast to IAS 12, FRS will not require deferred tax to be provided for when assets are revalued or adjusted to their fair values on the acquisition of a business.
Sir David Tweedie, ASB Chairman, said: ‘It was inevitable that UK companies would have to move to a full provision method of accounting for deferred tax. But we don’t think that they should be expected to accept the present international approach, which we believe requires companies to make provisions for tax that they may never have to pay.’
The lightly updated FRS 18 ‘Accounting Policies’ also published today replaces SSAP 2. It deals with the selection, alteration and disclosure of accounting policies.
The revised standard now demands that companies adopt accounting policies that are most appropriate to its particular circumstances in order to give a true and fair view, but only within the constraints of other accounting standards and companies legislation.
Companies also have to adhere to Statements of Recommended Practice where these cover the business’ activities. They must also to disclose whether SORPs have been followed and explain any departures from the guidance.
Sir David Tweedie said: ‘SSAP 2 was a popular standard, but its approach to underlying concepts had not kept pace with subsequent national and international developments in accounting. We’ve tried to retain the SSAP’s core requirements for FRS 18, but we’ve brought the framework up to date and tidied up some loose ends. For most entities, the impact of these changes is unlikely to be large, but the new standard provides a solid foundation on which to build in future.’
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