FRS 19 Deferred Tax
FRS 19 (December 2000) (PDF)
FRS 19 ‘Deferred Tax’ was issued on 7 December 2000. It superseded SSAP 15 ‘Accounting for deferred tax’, becoming effective for years ending on or after 23 January 2002. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective.
The FRS requires deferred tax to be provided for on a ‘full provision’ basis—rather than the ‘partial provision’ basis previously required by SSAP 15—on most types of timing difference. It permits but does not require entities to discount long-term deferred tax balances. It also requires reporting entities to explain (by reconciliation) the differences between their effective tax rates and the standard rate of tax.
The new requirements bring accounting practice in the UK and the Republic of Ireland more closely into line with international requirements. However, there are differences between the requirements of the FRS and the equivalent International Accounting Standard, IAS 12 (revised 1996) ‘Income Taxes’, reflecting differences in the conceptual approaches underlying them.
Summary of requirements
FRS 19 ‘Deferred Tax’ requires full provision to be made for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation.
The general principle underlying the requirements is that deferred tax should be recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The FRS:
requires deferred tax to be recognised on most types of timing difference, including those attributable to:
accelerated capital allowances
accruals for pension costs and other post-retirement benefits that will be deductible for tax purposes only when paid
elimination of unrealised intragroup profits on consolidation
unrelieved tax losses
other sources of short-term timing difference
prohibits the recognition of deferred tax on timing differences arising when:
a non-monetary asset is revalued without there being any commitment to sell the asset (subject to the exception outlined below)
the gain on sale of an asset is rolled over onto replacement assets
a non-monetary asset is adjusted to its fair value on the acquisition of a business
the remittance of a subsidiary, associate or joint venture’s earnings would cause tax to be payable, but no commitment has been made to the remittance of the earnings
requires deferred tax assets to be recognised to the extent that it is regarded as more likely than not that they will be recovered.
As an exception to the general requirement not to recognise deferred tax on revaluation gains and losses, the FRS requires deferred tax to be recognised when assets are continuously revalued to fair value, with changes in fair value being recognised in the profit and loss account.
The FRS permits but does not require entities to adopt a policy of discounting deferred tax assets and liabilities.
The FRS includes other requirements regarding the measurement and presentation of deferred tax assets and liabilities. These include requirements for the deferred tax to be:
- measured using tax rates that have been enacted or substantively enacted
- presented separately on the face of the balance sheet if the amounts are so material that, in the absence of such disclosure, readers may misinterpret the accounts
The FRS requires information to be disclosed about factors affecting current and future tax charges. A key element of this is a requirement to disclose a reconciliation of the current tax charge for the period to the charge that would arise if the profits reported in the accounts were charged at a standard rate of tax.
The FRS amends FRS 7 ‘Fair Values in Acquisition Accounting’. The amendment requires deferred tax recognised in a fair value exercise to be measured in the same way as it would have been if the adjustments to fair values had been gains and losses reflected in the acquired entity’s own financial statements.
Comparison with IAS 12
The requirements of the FRS are similar to those of the equivalent International Accounting Standard (IAS) 12 (revised 1996)—both require deferred tax to be provided for in full on most types of timing difference.
However, there are significant differences between the two standards. The ASB does not agree with the conceptual arguments underpinning the requirements of IAS 12 (revised 1996), which it believes lead to companies making excessive provisions. It has therefore taken a different conceptual approach. The most important practical consequence is that, unlike IAS 12 (revised 1996), the FRS does not in general require deferred tax to be provided for when non-monetary assets are revalued or when they are adjusted to their fair values on the acquisition of a business.
A second significant difference is that the FRS allows (but does not require) deferred tax liabilities that will not be settled for some time to be discounted to reflect the time value of money. In contrast, IAS 12 (revised 1996) prohibits discounting.
There are a number of other differences between the requirements of the FRS and those of the IAS. These are set out in Appendix IV to the FRS.
Background to FRS requirements
The changes introduced by the FRS reflect an acceptance of the need to harmonise the way in which deferred tax is accounted for in the UK and the Republic of Ireland with the way in which it is accounted for in other countries.
In recent years, the partial provision method of accounting for deferred tax required by SSAP 15 has lost favour internationally, primarily because it is subjective (relying heavily on management expectations about future events) and inconsistent with other areas of accounting. Other major standard-setters and IAS 12 (revised 1996), now require deferred tax to be provided for in full. Whilst the ASB could see the merits of the partial provision method, it accepted some of the arguments against it and concluded that deferred tax was not an area where a good case could be made for taking a stand against the direction of international opinion.
Appendix V to the FRS provides a detailed analysis of the features of and rationale for the various approaches to deferred tax considered by the ASB, including that adopted in IAS 12 (revised 1996).
In particular, the analysis develops two different approaches to full provision accounting. The first argues that deferred tax should be provided for only when it reflects an existing obligation at the balance sheet date (the ‘incremental liability’ approach). The second argues that provisions should be made for all the future tax inherent in the carrying value of an asset (the ‘valuation adjustment’ approach). The valuation adjustment approach developed by the Board has similar objectives to the ‘temporary difference’ approach on which IAS 12 (revised 1996) is based. However, it is framed differently and does not require exceptions to its basic principles to avoid some of the more controversial consequences of the temporary difference approach.
The Appendix also explains in detail why the Board:
decided to issue an FRS requiring full rather than partial provision for deferred tax
did not pursue the option of moving to flow-through accounting (whereby no provision is made for deferred tax)
chose not to adopt the requirements of IAS 12 (revised 1996
chose to adopt an incremental liability rather than a valuation adjustment approach as the basis for the requirements in the FRS
decided to permit but not require entities to discount deferred tax.
Finally, the appendix explains how the ASB applied the approach it developed to arrive at the detailed requirements of the FRS and it took into consideration the views of those commenting on earlier consultation papers.