2015 Year DR interest (P and L) £49
CR loan £49
2016 Year DR interest (P and L) £51
CR loan £51
DR loan (repayment made) £1,000
CR bank £1,000
Notes
- The present value of a financial liability that isrepayable on demandis equal to the undiscounted cash amount payable reflecting the lender’s right to demand immediate repayment. Therefore the above treatment is not needed.
- If the loan had a market rate of interest in the agreement then there would be little difference to the treatment under old UK GAAP.
- The above treatment is similar to the accounting for a fixed term interest-free loan between a parent and its subsidiary. In the books of the parent, the amount shown above as an increase in equity would be treated as an increase in the investment in subsidiary.
Tax treatment
The capital contribution of £100 will be recognised in the company’s statement of changes in equity and the finance expense of £49 (2015) and £51 (2016) will be recognised in its income statement. The computation of taxable amounts was amended by the Finance Bill 2015 to bring greater alignment with the usual (GAAP) approach for the computation of accounting profits. Tax will be based only on amounts recognised as items of accounting profit or loss rather than on amounts recognised elsewhere in the accounts.
2. Holiday pay accrual
Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the reporting period in which the employees render the related service.
Accounting treatment
A normal accrual would be provided for the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.
Tax treatment
In most cases it will the case that the holiday pay accrual adjustments in the profit and loss account will be tax deductible. However, it should be noted that the holiday pay policy of some employers may mean there is the possibility that the accrual will include some holiday periods that have not been taken/will not be taken within nine months of the year end which will mean that technically that part of the accrual would not be deductible for tax purposes.
3. Deferred tax
Where assets have been revalued, FRS 102 requires that deferred tax is recognised on all timing differences. Revalued assets will therefore now require deferred tax to be recognised on any revaluation gains or losses. Previously under FRS 19, no deferred tax was recognised on revalued assets unless there was a binding commitment to sell.
Accounting treatment
The treatment for the additional deferred tax expense (or income) will follow the presentation of the related transaction (as is the case under FRS 19). The presentation relates to what type of asset has been revalued. For instance, if the asset is an investment property, the revaluation movement is normally shown in the profit and loss account. Therefore, the movement in deferred tax arising from the revaluation of investment properties will be included as part of the tax charge for the year, whereas the deferred tax arising on the revaluation of properties (which is normally treated through the statement of comprehensive income) will generally be included in other comprehensive income.
Notes
- The transitional provisions in FRS 102 permit certain types of assets to be measured at ‘deemed cost’ which may be either the fair value of the asset or a revalued amount produced previously. This would mean that deferred tax would normally have to be provided on these amounts on transition.
- The inclusion of additional deferred tax balances may have an effect on the company’s credit rating due to the reduction in net assets.
- Movements on revaluation – investment properties v other properties
Accounting treatment
The treatment of movements on revaluation differs between those on investment and other properties:
Investment properties
FRS 102 requires revaluation each year to fair value (equivalent to open market value) of investment properties with value changes taken to profit or loss. The cost less depreciation model is used only if fair value cannot be measured reliably without undue cost or effort.
Therefore a gain movement of £100,000 would be shown as:
DR Investment property £100,000
CR Profit and loss account £100,000
On the profit and loss account this might be shown as:
2016 2015
£ £
Gross profit
Distribution costs
Administrative expenses
Operating profit
Gain on revaluation of investment property
Interest receivable
Interest payable
Profit on ordinary activities before taxation
Notes
- The profit on revaluation of investment property will not be a realised profit available for distribution. An entity may choose to transfer such gains and losses to a non-distributable reserve, but there is nothing in the law to require this.
Other properties
If an asset’s carrying amount is increased as a result of a revaluation, the increase is recognised in other comprehensive income and accumulated in equity. However, the increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
The decrease of an asset’s carrying amount as a result of a revaluation is recognised in other comprehensive income to the extent of any previously recognised revaluation increase accumulated in equity, in respect of that asset. If a revaluation decrease exceeds the revaluation gains accumulated in equity in respect of that asset, the excess is recognised in profit or loss.
Therefore a gain movement (not a reversing one) of £ 100,000 would be shown as:
DR Investment property £ 100,000
CR Other comprehensive income £ 100,000
On the comprehensive income statement this might be shown as:
2015 2014 £ £
Profit for the financial year
Other comprehensive income
Gain on revaluation of land and buildings
Deferred taxation arising on the revaluation
of land and buildings
Total comprehensive income for the year
Notes
- The deferred taxation is also shown on this statement following the presentation of the actual gain.
Tax treatment
Investment properties
Assuming the property is held, for tax purposes, as an investment, the income arising on the property is brought into tax as it is recognised in the accounts (for example rental income would be brought into tax as recognised in profit or loss). In this case, movements in fair value of investment properties are not taxable. The disposal of the investment properties will typically give rise to a chargeable gain.
Other properties
UK tax law departs from the accounting standards by disallowing depreciation and revaluations in respect of capital assets, and instead granting capital allowances (on some assets). Hence accounting changes from the transition and FRS 102 should not have a tax impact.
