Many companies have made the change from UK GAAP to IFRS but there are a significant number of individual company accounts which are still being produced under UK GAAP.
As readers will be aware existing UK GAAP is to be replaced.
From 1 January 2015 those companies which are not already obliged to produce IFRS accounts will now have a choice;
- they can choose to adopt full IFRS
- they can choose to apply UK GAAP based on the recognition and measurement requirements of EU IFRS but with the disclosure exemptions set out in FRS 101. This might be appropriate for companies whose results are consolidated into full IFRS accounts but who do not want to have to deal with the burden of the extended disclosure requirement of full blown IFRS. Companies voluntarily moved to IRFS in the past would have the option of adopting this route
- they can choose to apply new UK GAAP under FRS 102
When a company changes its reporting from UK GAAP to IRFS or to new UK GAAP (FRS 102), it is not just the format and disclosure in the accounts that will be different but for many companies the numbers will also change. The change in accounting policy is likely to have a knock on effect on the tax returns for the relevant accounting period, particularly in the area of loans, exchange gains, derivatives and for oil and gas companies potentially the measurement of stocks and under-lift and over-lift.
If companies are contemplating making a change they should consider the tax implications at an early stage.
Taking as an example the position on derivatives; all of the accounting conventions will now include a requirement to carry derivatives at fair value. Most companies will then look to rely on the disregard regulations to manage the volatility in the tax charge that would otherwise result from the use of fair value, but there is an alternative which may be advantageous. Where derivatives are held at the commencement of the accounting period and an election is made prior to that date companies may choose not to operate under the disregard regulations and instead the initial adjustment in value on transition to the new accounting policy will be spread over 10 years for tax. The need to consider the likely values and make the election prior to the commencement of the accounting period means that time is of the essence.
We have also been looking at the existing rules dealing with connected companies debt. The law requires the use of the amortised cost basis of accounting for connected companies loan relationships. On adoption of one of the new accounting standards, a connected company loan which is currently being carried at cost may be required to be initially measured at fair value for accounting purposes. Subsequently loans will either be measured at amortised cost or may, depending on their terms, continue to be carried at fair value through the P & L.
HMRC have confirmed that the difference arising from the change on initial recognition should not normally be brought into tax, contrary to the view of certain parties. This issue will be further considered as part of the recent Condoc on ‘Modernising the taxation of corporate debt and derivative contracts’.
In the meantime, companies could consider amending certain terms of the loan to avoid differences on the adoption of the new standard from applying. The foreign exchange position could produce an unexpected result and should be carefully reviewed.
Any company which is intending to change their accounting policy in the foreseeable future should identify the extent to which this will impact their tax position.