Accounting for Deferred Tax Under FRS102 - Basics

What is Deferred Tax?

Deferred Tax is defined as the amount of income tax payable / recoverable in respect of the taxable profit / loss for future reporting periods as a result of past transactions or events.

How is Deferred Tax calculated?

Deferred Tax should be recognised in respect of temporary timing differences at the reporting date. The accounting effect and tax effect of the transactions therefore fall into different periods.

Temporary timing differences are differences between the carrying amount of the asset / liability and its tax base i.e. the amount at which it is taxed. These differences gives rise to an asset / liability which will be taxed in the future.

Examples include;

  • Accounting depreciation vs Tax depreciation (Capital Allowances)
  • Unrelieved tax losses
  • Revaluations of fixed assets / investment property

What rate should I use to calculate Deferred Tax?

Deferred Tax should be measured by reference to the tax rates / laws that have been ‘enacted or substantively enacted by the balance sheet date’. An entity is required to apply the rates that are expected to apply when the reversal of the timing differences occur.

It should be noted that Deferred Tax relating to a non-depreciable asset measured using the revaluation model and investment property measured using the fair value model should be calculated using the tax rules applicable to the sale of the asset.

A ‘substantively enacted’ tax rate can include:

  • A Bill passed by House of Commons
  • A resolution having statutory effect that has been passed under the Provisional Collection of Taxes Act 1968.

The 2016 Budget saw the government introduce a main rate of corporation tax at 17% for financial years commencing 1 April 2020.

How should I present Deferred Tax in the financial statements?

Deferred Tax follows the treatment of the item to which it is attributable. For example, the tax arising on revaluation of investment property will appear within the Income Statement as this is where the gain/loss on revaluation is to be recognised.

In the Balance Sheet, a Deferred Tax liability is required to be presented within ‘provisions for liabilities’ and a Deferred Tax asset to be presented within ‘debtors’.

Example of a Deferred Tax calculation:

1 April 20X8: Entity XYZ acquires an investment property for £22,000,000. The entity recognises the property under FRS 102 at fair value at a revalued amount of £30,000,000. The revaluation gain is £8,000,000 recognised in the Income Statement.

The tax rate to be used will be the expected tax rate applicable to the sale of asset. At 17% this gives rise to a deferred tax liability of £1,360,000.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.