The Financial Reporting Council is the UK’s lead audit regulator and is charged with promoting high quality financial reporting and governance in order to provide reassurance to investors. Earlier in 2013 it introduced its latest set of reporting standards, FRS 102, which follows on from FRS 100 and FRS101 and this will replace existing UK GAAP. Many large entities will be applying the new standard so, with a few exceptions which need to apply the rather onerous 3,000 pages of EU adopted IFRS, most entities will be using the 300 or so pages of FRS 102.
FRS 102 needs to be adopted for accounting periods commencing on or after 1st January 2015 although some companies will choose to adopt it earlier as there could well be tax cash flow advantages to be derived from early adoption. This is because under FRS102, there are several areas of financial reporting where the tax treatment follows the accounting treatment and therefore the changes may affect the timing of the tax charge on a credit or the tax deduction for a debit.
Consider, for example, the position where movements in the fair value of financial instruments are recognised in profit and loss. The default rule is that tax follows the accounts, meaning that a tax cash flow advantage may arise in an accounting period in which the movement in fair value is a debit. Conversely, of course, a cash flow disadvantage may arise when it is a credit.
In a similar vein, investment property will be obliged to have a fair market value attributed to it on each balance-sheet date where this can be achieved without undue cost and effort. However, movements in such values will not impact on the tax position as any gains or losses are classified as being of a capital nature and therefore ignored for tax purposes. Tax will only generally be relevant where a gain or loss arises on the sale of the property.
Where a property is leased by a company with the benefit of various incentives, under FRS102, a lessee will recognise the aggregate benefit of such lease incentives as a reduction to the lease expense over the full term of the lease. From an accounting point of view, this represents an improvement over the existing regime since the benefit of the incentives is spread over a longer period. As this is another area where tax follows the accounts inasmuch as the incentive is of a revenue rather than capital nature from a tax perspective, a tax cash flow advantage may therefore arise in transitioning to a longer period of recognising the benefit.
Another possible instance of FRS 102 leading to a tax cash flow benefit occurs when certain software costs are reclassified under the new standard from property, plant and equipment fixed assets to intangible fixed assets, leading to the possible acceleration of tax relief through accounting amortisation of these software intangibles instead of capital allowances.
These are just some examples of how FRS102 can benefit tax cash flow but, clearly, much will depend on how significant these items are in the context of total tax liabilities.