Amendments to FRS102 and potential tax implications

Tue 16 Jan 2018

On 14 December 2017 the Financial Reporting Council (FRC) announced it had completed a triennial review of FRS 102 and confirmed the simplification of the measurement of directors’ loans to small entities, following the interim relief granted earlier in 2017 (which allows small entities to account for loans from director-shareholders who are natural persons at transaction price rather than present value).  The FRC note on the amendments can be found here.

The other principal amendments to FRS 102 as a result of the triennial review are to:

1. require fewer intangible assets to be separated from goodwill in a business combination;
2. permit investment property rented to another group entity to be measured by reference to cost, rather than fair value;
3. expand the circumstances in which a financial instrument may be measured at amortised cost, rather than fair value; and
4. simplify the definition of a financial institution.

Amendments are also made to provide relief from recognising tax payable when a trading subsidiary expects to make a distribution of a gift aid payment to its charitable parent, and to incorporate the new small entities and micro-entities regimes in the Republic of Ireland (the latter by amendments to FRS 105).

The amendments to FRS 102 apply to accounting periods beginning on or after 1 January 2019. Earlier application is permitted provided all amendments are applied at the same time i.e. on an all-or-nothing basis.

The Mazars financial and reporting advisory team has issued some updates on these changes found here, here, and here.

Potential tax implications

If a different accounting treatment applies to a set of financial statements as a result of the amendments to FRS102 , this would count as a change of accounting policy.  From a tax perspective it would then be necessary to consider the change of accounting basis provisions at CTA 2009 s180-187 and CTA 2009 s315-319, CTA 2009 s612-615 and the change of accounting practice regulations SI 2004/3271).

Where fewer intangible assets are separated from goodwill in a business combination, this may have an impact on the tax treatment of intangible assets, and whether and how the intangible asset regime or capital gains tax regime applies to those assets.

The change to gift aid payment rules for payments from subsidiaries to charitable parents means that the tax effects of a post year end gift aid payment can be taken into account at the reporting date if it is probable it will be made within nine months of the year end. This may alleviate difficulties in deciding whether a distribution from a subsidiary to a parent is a valid distribution for company law purposes.

The change to accounting for directors’ loans to small companies means that the requirement under FRS102 to measure such a loan at the present value of the future payments discounted at a market rate of interest for a similar debt instrument, is optional for small companies with respect to received loans from a director shareholder who is a natural person. This will avoid the need to account for an initial discount on an interest free term loan with a subsequent unwinding of that discount. Debits arising from such loans from natural persons are not taken into account for tax unless the credits are also brought into account for tax, as a result of CTA 2009 s446A.  Where the optional accounting treatment is taken, the tax considerations for such loans could be simpler.

In all cases the implications for deferred tax accounting should be considered.

To discuss the tax implications of changes to accounting standards please get in contact with a member of the Mazars corporate tax team.