New UK GAAP Tax implications of moving to FRS 102

Transcription

1 New UK GAAP Tax implications of moving to FRS June 2014 Download the slides to accompany the webinar /FRFwebinarresources Introduction Sarah Porthouse Technical Manager, Financial Reporting Faculty 1

2 Introduction Paul Martin Training Manager Baker Tilly Eddy James Technical Manager Financial Reporting Faculty Ask a question Participate in today s webinar send us a question Audio problems if you experience poor sound quality you may benefit from selecting Use Telephone from your Audio Mode settings 2

3 Downloading the slides /FRFwebinars (/FRFwebinarresources) Contents Overview of the new UK regime Overview of tax implications Specific items Derivatives Financing transactions Foreign currency Investment property Goodwill & intangibles Biological assets Operating leases Employee benefits 3

4 New UK GAAP tax implications of moving to FRS 102 OVERVIEW OF THE NEW UK REGIME Four new standards FRS 100 Application of financial reporting requirements FRS 101 Reduced disclosure framework FRS 102 The FRS applicable in the UK and Republic of Ireland FRS 103 Insurance contracts Sets out the overall financial reporting requirements List of disclosure exemptions from full IFRS for qualifying entities A single comprehensive standard replacing almost all extant SSAPs, FRSs and UITF Abstracts Sets out the accounting and reporting requirements for entities with insurance contracts 4

5 Who does what? Currently applying Required to apply EUadopted IFRS Opted to apply IFRS Full UK GAAP New regime No change Choose between IFRS or FRS 102 Choose between IFRS or FRS 102 Reduced disclosures? No Yes, for parent and subsidiaries Yes, for parent and subsidiaries FRSSE No change yet Not applicable Major differences Format of the financial statements Financial instruments Business combinations Investment properties Deferred tax Employee benefits Lease incentives 5

6 Factsheets Financial Reporting Faculty members only FAQs available to all 6

7 New UK GAAP tax implications of moving to FRS 102 OVERVIEW OF TAX IMPLICATIONS Overview of tax treatment The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for tax purposes Statute CTA 2009 (s46) and ITTOIA 2005 (s25) 7

8 Poll Transitional adjustments arising on the adoption of FRS 102 aren t relevant for tax but the subsequent impact on P&L will be. True False Overview of tax treatment Two considerations for impact on tax Transitional adjustment arising on conversion to FRS 102 Accounting under FRS 102 8

9 New UK GAAP tax implications of moving to FRS 102 SPECIFIC ITEMS Derivatives Old UK GAAP In most cases fair value disclosed FRS 102 Derivatives held on the balance sheet at fair value with fair value gains and losses through P&L 9

10 Examples Most common types of derivatives Forward FOREX contracts Interest rate swaps Interest rate caps/collars Poll Has your business entered into any hedging arrangements such as forward currency agreements or interest rate swaps recently? Yes No Not sure 10

11 Tax implications Loan relationship rules Part 5 CTA 2009 s307 - amounts to be brought into account by a company as credits and debits for any period for the purposes of this part are those that are recognised in determining the company s profit or loss for the period in accordance with generally accepted accounting practice s308(1) defines profit or loss for a period widely = all statements of profits or losses Includes adjustments arising on change of accounting policy involving change of value Tax implications The Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations The Change of Accounting Practice Regulations provide some relief when the Disregard Regs are not relevant Broadly they act to spread an adjustment arising on a change in accounting policy over 10 years 11

12 Tax implications The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations The Disregard Regulations Apply to hedging instruments such as derivatives Broadly they prescribe that the FV movements in the statements of profits or losses are disregarded for tax purposes Election can be made to opt out of disregard Financing transactions Para FRS 102 and/or Sale of goods or services where payment is deferred beyond normal business term Where financing is provided at a nonmarket rate of interest 12

13 Financing transactions Treatment Discount the initial transaction to present value Recognise a gain or loss in P&L Recognise interest income or expense over the period of the financing Example Financing transactions intercompany loan Co A lends Co B 5m at a zero rate of interest repayable in 4 years time, market rate of interest if 3%. How is this accounted for? Current UK GAAP - borrower Dr Cash 5,000,000 Cr Loan 5,000,000 No interest charged so no interest expense Dr Loan 5,000,000 Cr Cash 5,000,000 13

14 Example Financing transactions intercompany loan Co A lends Co B 5m at a zero rate of interest repayable in 4 years time, market rate of interest is 3%. FRS borrower Initially record at present value = 5m/(1.03)^4 = 4,442,435 Dr Cash 5,000,000 Cr Loan 4,442,435 Cr Finance income (P&L) 557,565 Example Financing transactions intercompany loan Year * 4,442,535 = 133,276 Dr Finance costs 133,276 Cr Loan 133,276 Year = ( 4,442, ,276) = 137,271 Dr Finance costs 137,271 Cr Loan 137,271..same process for years 3, 4. then: Dr Loan 5m Cr Cash 5m 14

15 Tax implications Tax cash flow volatility For borrower taxable credit on initial recognition Tax deductible debits in later years over the period of the loan Treatment unlikely to apply if loan repayable on demand rather than being for fixed term Possible transfer pricing issues for connected companies Foreign currency Contract rate accounting Net investment hedging Permanentas-equity loans 15

16 Investment property Old UK GAAP Hold at open market value with increases and decreases in open market value going to a revaluation reserve Depreciation not allowed FRS 102 Where fair value can be reliably measured, hold at fair value with movements through the P&L Where fair value cannot be reliably measured, hold at depreciated cost Tax implications Fair value debits and credits in P&L Capital by nature therefore ignore for tax Only relevant for tax on disposal of property Compliance issue adjustment required 16

17 Goodwill and intangibles Old UK GAAP Residual interest after recognising the fair value of all separable assets and liabilities Amortised over useful life, rebuttable presumption that this does not exceed 20 years FRS 102 Residual interest after recognising the fair value of all identifiable assets and liabilities Amortised over its useful life which, if cannot be reliably measured, is assumed to be five years Practically this means more intangible assets will be recognised separately from goodwill at fair value in the group accounts Tax implications Part 8 CTA 2009 broadly aligns the tax treatment of intangible assets, including goodwill, with the accounting treatment: amortisation = tax deduction Transitional adjustments on adoption of FRS 102 are also relevant for tax including those arising on disaggregation Fixed rate writing down election (4% p.a.) may be relevant for tax election is irrevocable Website and software development costs Possible transitional issues Tax relief via amortisation Potential for relief under R&D rules 17

18 Biological assets A living animal or plant For each class of biological asset and its related agricultural produce an entity shall choose as its accounting policy either: (a) the fair value model; or (b) the cost model An entity applying the fair value model shall measure a biological asset on initial recognition and at each reporting date at its fair value less costs to sell Changes in fair value less costs to sell shall be recognised in profit or loss Tax implications Following legal advice, HMRC's view is that where: mark to market (MTM) basis of valuation is used in any company s accounts the use of it is in accordance with generally accepted accounting practice (including appropriate industry Statements of Recommended Practice), the profits and losses thrown up by the comparison of fair values is taken to profit and loss account or its equivalent, and not to reserve, then there is no rule of law requiring the profits or losses disclosed by the accounts to be adjusted for tax purposes to give effect to the realisation basis. HMRC at Business Income Manual (BIM 33160) 18

19 Tax implications Transitional adjustment from cost to fair value for trading stock CTA 2009 s185 Change from realisation basis to mark to market Adjustment arising treated as not arising until the period of account in which the value of the asset is realised CTA 2009 s186 Election for spreading Adjustment spread across each of the 6 periods of account beginning with the first to which the new basis applies Operating leases SSAP 21 & FRS 102 Lessee accounts for rental expenses in P&L on a straight line basis over the lease term Lease incentives such as a rent free period, relocation costs and fitting out to make it suitable for the lessee UITF 28 para 14 The benefit should be allocated over the shorter of the lease term; and a period ending on a date from which it is expected the prevailing market rental will be payable FRS 102 para 20.15A A lessee shall recognise the aggregate benefit of lease incentives as a reduction to the expense recognised over the lease term, on a straightline basis 19

20 Transition Para (p) FRS 102 Where the lease term commences before transition to FRS 102 there is a choice in treatment continue with existing UK GAAP spreading; or spread over the lease term Example Operating lessee Lease incentive of 1m paid upfront to lessee for a 10 year noncancellable lease with a 5 year rent review. Dr Bank 1,000,000 Cr Lease incentive liability 1,000,000 Each year Dr Lease incentive liability 200,000 Cr P&L 200,000 At the start of the fourth year, the lessee transitions to FRS 102. At that point the liability is 400,

21 Example Operating lessee Had the lessee been spreading over the lease term what would the liability have been at the point of transition? Each year 1-3 Dr Liability 100,000 Cr P&L 100,000 So at transition liability would have been 700,000. Therefore the transitional adjustment to FRS 102 is: Dr Reserves 300,000 Cr Lease liability 300,000 Tax implications Where lease incentive is of a revenue nature such as a rent free period Tax generally follows the accounting treatment Therefore timing of income recognition altered for tax purposes In our example: Transitional adjustment of 300,000 = tax deductible Subsequent credit of 100,000 p.a. for next 7 years = taxable 21

22 Employee benefits holiday pay accruals Old UK GAAP FRS 102 Sometimes accounted for, mixed practice Must account for Tax implications Accrual treated in line with the treatment of unpaid remuneration rules in CTA 2009 s1288 CTA09 The 9 month rule In most cases it should be the case that the holiday pay accrual adjustments in P&L will be tax deductible/taxable Exception will be those occasions when the holiday pay policy of a particular employer mean there is the possibility that the accrual will include some holiday periods that have not been taken/will not be taken within 9 months of the year end? 22

23 Other impacts to consider Balance sheet totals R&D regime Transfer pricing regime Distributable profits Deferred tax Unincorporated businesses Poll Distributable profits of a company will potentially be affected by the accounting changes under FRS 102? Yes No Not sure 23

24 Any questions? Ask a question Participate in today s webinar send us a question Click here to see questions 24

25 Questions Paul Martin Training Manager Baker Tilly Eddy James Technical Manager Financial Reporting Faculty Topics covered today Overview of the new UK regime Overview of tax implications Specific items Visit our website /newukgaap 25

26 Future webinars and events Webinars 21 Oct Life after the FRSSE a new reporting regime for small and micro-entities 20 Nov FRS 102 refresher /webinars Events Financial reporting faculty roadshow Preparing to move to the new UK GAAP CPD training First time adoption workshop 24 Oct UK GAAP conference /events THANK YOU FOR ATTENDING Contact the Financial Reporting Faculty +44 (0) frfac@ /frf Previous webinars /frfwebinars Please take the time to fill out our short survey 26

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