FRS 102 and accounting for deferred taxation

Do you know how to account for deferred taxation under FRS 102?

original

Following the announcement in the former Chancellor Kwasi Kwarteng’s ‘mini-Budget’ – and reversal of measures announced since then – corporation tax rates will be increasing to 25% from 1 April 2023 after all. This is going to impact how much deferred tax is accrued within the accounts for the accounting period ending after 24 May 2021 (the date Finance (No. 2) Bill was enacted).

Section 29 of FRS 102 requires:

  • to measure deferred tax using the tax rates and laws that have been enacted or substantively enacted by the reporting date that are expected to apply to the reversal of the timing difference(s)
  • deferred tax to be calculated using the ‘timing difference plus’ approach. Nonetheless, to understand whether a timing difference exists or not, accountants need to understand the tax rules applicable to the entity.

Furthermore, there are always concerns and confusion on whether a deferred tax asset should be provided in the accounts or not. Deferred tax assets are only recognised to the extent that it is probable (ie more likely than not) that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

The need to consider whether the entity will generate ‘future taxable profits’ is critical where deferred tax assets are concerned. If the entity does not have the ability to generate such future taxable profits, a deferred tax asset will not be recognised.

ACCA’s technical factsheet on deferred tax provides guidance on these dilemmas and other topical questions including:

  • how the deferred tax should be measured in line with increase in tax rates with examples
  • indicators that the entity will generate future taxable profits for deferred tax asset provision
  • impact of super deduction claim on deferred tax provision if any
  • last but not least the presentation of deferred tax liability and asset.

Please note section 24 of FRS 105 prohibits the recognition of deferred tax which represents the future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.