Companies in capital-intensive industries such as oil, utilities and transport could see millions of pounds wiped off their market capitalisations under new Accounting Standards Board rules on tax provisions.
Under the draft standard, which seeks to align the UK with international practice, companies must provide in full for tax liabilities that often total hundreds of millions of pounds.
British Steel admitted this week it had deferred tax liabilities of £386m but had provided for just £16m. The difference – £370m – equates to almost 16% of the company’s net current assets. Had the change been applied to the company’s accounts for the year to April, it would have cut profits by £14m.
BT has around £1,896m of unprovided deferred tax – 10% of its net assets – while National Grid has £589m, 34% of the company’s net assets.
Increasing the size of tax liabilities on the balance sheet would cut reported net assets and distributable profits, the ASB admitted, reducing reported post-tax earnings.
But in a concession, FRED 19 sets out a discounting formula to reduce its impact.
‘We’re talking big numbers,’ said ASB chairman Sir David Tweedie. ‘We plan to allow discounting where it has a material effect, which should reduce the size of the liabilities for many companies – especially utilities.’
Eric Anstee, former Energis finance director, warned full provisioning would affect both companies’ dividends and their borrowing positions.
The balance sheets of Scottish & Southern Energy, Scottish Power and oil giant BP Amoco would all be hit as they still use UK GAAP.
Unlike international rules, the new standard will not require UK companies to provide for deferred tax on revaluation gains unless there is an obligation to sell the asset.
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