Accounting For Deferred Tax Becomes Popular With UK Business

by Robert Lee, Tax-News.com, London

25 September 2001

FRS19, the system for accounting for deferred tax, is due to take over from SSAP15 from 23 January 2002. According to Accountancy Age, over half of 40 FTSE companies surveyed by PricewaterhouseCoopers have assessed the impact of the changeover and nine aim to adopt the system early.

FRS19 requires companies to account for their tax liabilities in full, which is likely to result in a substantial drop in recorded earnings, compared to SSAP15 which required deferred tax to be provided for on a partial basis. The new system helps the UK to be more on a par with international standards and US regulations in particular.

However, there is much that is misunderstood by some companies. Most of those aiming for early adoption of the FRS19 said they wanted to do so because it enabled them to recognise a deferred tax asset from brought forward tax losses which is not allowed under SSAP15.

But for this to be the case, deferred tax assets must be 'regarded as more likely than not that they will be recovered,' this means, for example that if a company has sustained a history of trading losses it is likely to be assumed that there will be no taxable profits in the future against which 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.'

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