Deferred tax on stock options uk gaap

Deferred tax on stock options uk gaap

Posted: milsa Date: 26.05.2017

The section of the new UK GAAP FRS covering deferred tax has been one of the standard's most hotly disputed parts. To put it in context, the IFRS for SMEs, on which FRS is based, took the bold step of basing its tax section on a new model that the International Accounting Standards Board IASB was putting forward to replace IAS 12, Income Taxes.

This model had some conceptual problems as well as certain requirements which could not practically be applied, and by the time the Financial Reporting Council FRC came to work on FRS , these problems had become apparent and the IASB's project to revise IAS 12 on this basis had been set aside. The FRC, left with a void, originally proposed using a reduced version of the international requirements from IAS 12, but this did not receive much support when the proposal was set out in an exposure draft.

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So, in the final version of the standard, section 29 sets out a 'timing differences plus' approach, which is in many respects very similar to FRS 19, Deferrred Tax, but has a small number of differences in detail which could trip the unwary. Revision of the basics.

Deferred tax under new UK GAAP | Accounting standards | Library | ICAEW

A preparer begins by identifying timing differences that is amounts which are recognised in the statement of comprehensive income in a different period from when they are included in the tax computation.

Deferred tax is then usually provided in respect of these timing differences by looking at the expected timing of the reversal of the difference and multiplying it by tax rates that will apply at the time. For permanent differences where there are items in total comprehensive income that will never be chargeable or deductible for tax purposes, or vice versa , no deferred tax is provided.

These simple principles become difficult through the exceptions or refinements that are then included in the standard, or in the absence of familiar exceptions from FRS Under current UK GAAP, revaluing a fixed asset does not usually lead to a requirement to provide extra deferred tax, until there is a binding commitment to sell the asset.

Under FRS , however, there is no special treatment for revaluations they are treated as giving rise to timing differences. The accounting gain recognised in other comprehensive income is not matched with an immediate increase in taxable profits; instead, the gain will be taxed when the asset's additional value is realised.

So at the first balance sheet date after a revaluation, deferred tax would be based on the full timing difference.

In practice, this means the timing difference provided for will increase by the amount of the revaluation gain, regardless of the owner's intentions for future use of the property. Under current UK GAAP, an acquirer of a subsidiary performs a fair value exercise on the acquiree's balance sheet, bringing in the assets and liabilities at these new values, and recognising goodwill as the difference between the purchase consideration and the fair value of assets acquired.

FRS 7, Fair Values in Acquisition Accounting, tells preparers to recognise deferred tax on fair value adjustments by applying the same principles as in FRS 19, meaning that for fair value uplifts on items such as tangible fixed assets, no deferred tax will be provided.

FRS has a similar requirement, although it is phrased in language more reminiscent of IFRS, requiring preparers to compare 'the amount that can be deducted for tax for an asset' to the value recognised for that asset, which is not the way a timing difference is normally calculated. This is a special case, one where only this single paragraph is relevant and the treatment cannot quite be analogised to anything else in the section.

FRS does not allow deferred tax assets and liabilities to be discounted. This has caused discomfort for some critics, and has in some cases been held up as an example of the counter-intuitive nature of accounting for deferred tax at all: The conceptual debate, however, does not change the outcome. This part of FRS is a curious hybrid, with very few practical differences from UK GAAP despite the FRC's commitment to 'an IFRS-based solution'.

The specific requirements for goodwill, above, are one example of adapting the UK principles to require accounting for a temporary rather than timing difference.

In some places, though, it is just not possible to reach the same accounting using this framework as would be achieved under IFRS. One example is share based payments where during a scheme's life the tax deduction, or estimated future deduction, is more than the cumulative accounting charge. IFRS would require recognition of deferred tax in this circumstance, but FRS would not allow it.

This might arise where, for instance, options had a low fair value on issue because the issuer's share price was expected to remain steady and the exercise price was close to that share price , but where before the options vested there was an unexpected surge in the issuing company's value, so that a large deduction becomes likely.

deferred tax on stock options uk gaap

While in practice many preparers will find that they need no transition adjustments for deferred tax, this is an area where careful review will be needed to ensure that no necessary adjustments are missed, and there is an unavoidable effect for those that revalue assets. A property asset with a year life, an original cost of , and a depreciated cost of , is revalued to , when it has 15 years of useful life remaining. As the asset is land and buildings, it is not eligible for capital allowances.

The revaluation gain of , gives rise to a timing difference because the accounting gain recognised in other comprehensive income is not matched with an immediate increase in taxable profits.

In subsequent years it seems likely that, by analogy to International Financial Reporting Standards IFRS , this liability will be gradually diminished as the revalued asset is depreciated.

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Under old UK GAAP, no deferred tax entries would have been made in respect of the revaluation unless there was a binding commitment to sell the asset, so the GAAP change means a difference in reported comprehensive income each year from the revaluation onwards, as the deferred tax liability unwinds under FRS FRS has only recently been released and a body of commentary has yet to be built up on it.

As such, there will always be a range of interpretations, particularly given the brevity of the standard. Readers are reminded to refer to the text of the standard itself when making their own judgments, and to bear in mind the hierarchy for developing accounting policies in section 10 of the standard:. Other sources of guidance, such as the IFRS for SMEs and accompanying documents, as well as the IASB staff's training materials, may be helpful in understanding the thinking behind some of the standard's content, but do not directly have authority.

It is to be expected that over the first few years of FRS application, common practice will develop to form a fuller 'new UK GAAP' but until that point, the words included in the standard are the best source of guidance. These articles should be understood to include the author's views. This article was originally published on Accountancy Live.

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deferred tax on stock options uk gaap

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