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«ACCOUNTING STANDARDS BOARD DECEMBER 1999 FRS 16 16 STANDARD FINANCIAL REPORTING C U R R E N T TA X ACCOUNTING STANDARDS BOARD Financial Reporting ...»

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ACCOUNTING STANDARDS BOARD DECEMBER 1999 FRS 16

16 STANDARD

FINANCIAL REPORTING

C U R R E N T TA X

ACCOUNTING

STANDARDS

BOARD

Financial Reporting Standard 16

‘Current Tax’ is issued by the

Accounting Standards Board in respect

of its application in the United Kingdom

and by the Institute of Chartered

Accountants in Ireland in respect of its application in the Republic of Ireland.

16 STANDARD

FINANCIAL REPORTING

C U R R E N T TA X ACCOUNTING STANDARDS BOARD Financial Reporting Standard 16 is set out in paragraphs 1-22.

The Statement of Standard Accounting Practice, which comprises the paragraphs set in bold type, should be read in the context of the Objective as stated in paragraph 1 and the definitions set out in paragraph 2 and also of the Foreword to Accounting Standards and the Statement of Principles for Financial Reporting currently in issue.

The explanatory paragraphs contained in the FRS shall be regarded as part of the Statement of Standard Accounting Practice insofar as they assist in interpreting that statement.

Appendix V ‘The development of the FRS’ reviews considerations and arguments that were thought significant by members of the Board in reaching the conclusions on the FRS.

©The Accounting Standards Board Limited 1999 ISBN 1 85712 091 4

ACCOUNTING STANDARDS BOARD DECEMBER  FRS 

CONTENTS Paragraphs SUMMARY

FINANCIAL REPORTING STANDARD 16

Objective 1 Definitions 2 Scope 3-4 Recognition 5-16 Disclosure 17 Date from which effective and transitional arrangements 18-21 Withdrawal of SSAP 8 and UITF

Abstract

16 22

ADOPTION OF FRS 16 BY THE BOARD

APPENDICES

I ILLUSTRATION OF PROFIT AND LOSS

ACCOUNT DISCLOSURE

II TRANSITIONAL ARRANGEMENTS FOR ADVANCE

CORPORATION TAX (UK ONLY)

III NOTE ON LEGAL REQUIREMENTS

IV COMPLIANCE WITH

INTERNATIONAL ACCOUNTING STANDARDS

V THE DEVELOPMENT OF THE FRS

ACCOUNTING STANDARDS BOARD DECEMBER  FRS 

SUMMARY Financial Reporting Standard  ‘Cur rent Tax’ a specifies how current tax, in particular withholding tax and tax credits, should be reflected in financial statements.

Current tax should be recognised in the profit and loss b account for the period, except to the extent that it is attributable to a gain or loss that has been recognised directly in the statement of total recognised gains and losses. Where a gain or loss has been recognised directly in the statement of total recognised gains and losses, the tax relating to that gain or loss should also be recognised directly in that statement.

Dividends, interest and other amounts payable or c

receivable should be recognised at an amount that:

• includes withholding taxes payable to the tax authorities wholly on behalf of the recipient.

• excludes any other taxes, such as attributable tax credits, not payable wholly on behalf of the recipient.

Subject to the above, income and expenses should be d included in the pre-tax results on the basis of the income or expenses actually receivable or payable, without any adjustment to reflect a notional amount of tax that would have been paid or relieved in respect of the transaction if it had been taxable, or allowable for tax purposes, on a different basis.

Current tax should be measured using tax rates and e laws that have been enacted or substantively enacted by the balance sheet date.

–  –  –

The objective of this  is to ensure that reporting entities recognise current taxes in a consistent and transparent manner.

Definitions The following definitions shall apply in the  and in particular in the Statement of Standard Accounting Practice set out in bold type.

Current tax:The amount of tax estimated to be payable or recoverable in respect of the taxable profit or loss for a period, along with adjustments to estimates in respect of previous periods.

–  –  –

The tax credit given under UK tax legislation to the recipient of a dividend from a UK company.

The credit is given to acknowledge that the income out of which the dividend has been paid has already been charged to tax, rather than because any withholding tax has been deducted at source. The tax credit may discharge or reduce the recipient’s liability to tax on the dividend. Non-taxpayers may or may not be able to recover the tax credit.

–  –  –

Taxable profit or loss:The profit or loss for the period, determined in accordance with the rules established by the tax authorities, upon which taxes are assessed.

Withholding tax:Tax on dividends or other income that is deducted by the payer of the income and paid to the tax authorities wholly on behalf of the recipient.





–  –  –

The FRS applies to all financial statements that are intended to give a true and fair view of a reporting entity’s financial position and profit or loss (or income and expenditure) for a period.

Reporting entities applying the Financial Reporting Standard for Smaller Entities currently applicable are exempt from the FRS.

Recognition Current tax should be recognised in the profit and loss account for the period, except to the extent that it is attributable to a gain or loss that is or has been recognised directly in the statement of total recognised gains and losses.

Where a gain or loss is or has been recognised directly in the statement of total recognised gains and losses, the tax attributable to that gain or loss should also be recognised directly in that statement.

–  –  –

Accounting standards (or, in their absence, legislation) require or permit certain gains or losses to be credited or charged directly in the statement of total recognised gains and losses (ie not in the profit and loss account).

The  requires any attributable tax to be treated in the same way. In exceptional circumstances it may be difficult to determine the amount of current tax that is attr ibutable to gains or losses that have been recognised directly in the statement of total recognised gains and losses. In such circumstances, the attributable tax is based on a reasonable pro rata allocation, or another allocation that is more appropriate in the circumstances.

Outgoing dividends paid and proposed (or declared and not yet payable), interest and other amounts payable should be recognised at an

amount that:

(a) includes any withholding taxes; but (b) excludes any other taxes, such as attributable tax credits, not payable wholly on behalf of the recipient.

Incoming dividends, interest or other income receivable should be recognised at an amount

that:

(a) includes any withholding taxes; but (b) excludes any other taxes, such as attributable tax credits, not payable wholly on behalf of the recipient.

The effect of any withholding tax suffered should be taken into account as part of the tax charge.

–  –  –

The amount recognised therefore excludes attributable tax credits of the type defined in the  and underlying tax.* Subject to paragraphs 8 and 9, income and expenses should be included in the pre-tax results on the basis of the income or expenses actually receivable or payable. No adjustment should be made to reflect a notional amount of tax that would have been paid or relieved in respect of the transaction if it had been taxable, or allowable for tax purposes, on a different basis.

The requirement in paragraph  applies, for example, to non-taxable income, non-deductible expenditure and income and expenditure subject to non-standard rates of tax.

The requirement applies only to notional tax, ie tax that is not actually paid or recovered. In some specialised industr ies, such as leasing and life insurance, profit from transactions is allocated to accounting periods on a post-tax basis and the tax charge and pre-tax profit relating to the accounting period is found by applying the effective rate of tax to the post-tax profit. Where, as is usually the case, such post-tax methods result in the actual pre-tax profit and the actual tax charge being recorded over the life of the transactions, their use is consistent with the requirements of the .

* In certain circumstances, a UK company receiving dividends from an overseas company obtains relief for the tax (underlying tax) that the overseas company has paid on the profits from which the dividend has been paid. The UK company’s taxable income is increased by the amount of underlying tax attributed to the dividend and relief is given against the resulting UK tax charge.

–  –  –

Current tax should be measured at the amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

A UK tax rate can be regarded as having been

substantively enacted if it is included in either:

–  –  –

(b) a resolution having statutory effect that has been passed under the Provisional Collection of Taxes Act .* A Republic of Ireland tax rate can be regarded as having been substantively enacted if it is included in a Bill that has been passed by the Dail.

–  –  –

The following major components of the current tax expense (or income) for the period in the profit and loss account and the statement of total recognised gains and losses should be

disclosed separately:

(a) UK or Republic of Ireland tax (depending on the companies legislation in accordance with which the entity is reporting); and

–  –  –

* Such a resolution could be used to collect taxes at a new rate before that rate has been enacted. In practice, corporation tax rates are now set a year ahead to avoid having to invoke the Provisional Collection of Taxes Act for the quarterly payment system.

–  –  –

Both (a) and (b) should be analysed to distinguish tax estimated for the current period and any adjustments recognised in respect of prior periods. The domestic tax should be disclosed before and after double taxation relief.

Date from which effective and transitional arrangements The accounting practices set out in the FRS should be regarded as standard in respect of accounting periods ending on or after 23 March

2000. Earlier adoption is encouraged.

Non-taxpaying entities that, at the date of implementation of the FRS, are entitled to transitional relief following the removal of their right to reclaim tax credits may continue to present that transitional relief as part of the income to which it relates. The nature and amount of the relief should be separately disclosed.

Any unrelieved advance corporation tax (ACT) that at the date of implementation of the FRS is carried forward for relief against future taxable profits should be recognised on the balance sheet only to the extent that it is regarded as recoverable. Any change in the amount of ACT regarded as recoverable should be recognised as part of the tax expense (or income) for the per iod in the profit and loss account and separately disclosed on the face of the profit and loss account or in a note.

–  –  –

Guidance on the circumstances in which ACT can be regarded as recoverable is included in Appendix II.

Withdrawal of SSAP 8 and UITF Abstract 16 The FRS supersedes SSAP 8 ‘The treatment of taxation under the imputation system in the accounts of companies’ and UITF Abstract 16 ‘Income and expenses subject to non-standard rates of tax’.

–  –  –

ADOPTION OF FRS 16 BY THE BOARD

Financial Reporting Standard 16 ‘Current Tax’ was approved for issue by the ten members of the Accounting Standards Board.

Sir David Tweedie (Chairman) Allan Cook CBE (Technical Director) David Allvey Ian Brindle Dr John Buchanan John Coombe Raymond Hinton Huw Jones Professor Geoffrey Whittington Ken Wild

–  –  –

This example illustrates one method of showing (by way of note) the tax items required to be disclosed under companies legislation* and the .

This appendix is for general guidance and does not form part of the Statement of Standard Accounting Practice.

–  –  –

* In Great Britain, the Companies Act 1985; in Northern Ireland, the Companies (Northern Ireland) Order 1986; and in the Republic of Ireland, the Companies (Amendment) Act 1986.

† Companies reporting in accordance with companies legislation in the Republic of Ireland would instead show the Republic of Ireland tax.

–  –  –

The definition of recoverable advance corporation tax (ACT) and the treatments for ACT set out below are based on the requirements of SSAP 8. These continue to be relevant for the shadow ACT system, which is designed to ensure that ACT carried forward after April 1999 is recovered only if it could have been recovered had the ACT system still existed.

Recoverable ACT:ACT is regarded as recoverable where the amount of the ACT previously paid on outgoing dividends can

be:

(a) set off against a corporation tax liability on the profits of the period under review or of previous periods;

(b) properly set off against a credit balance on the deferred tax account; or (c) expected to be recoverable taking into account expected profits and dividends—normally those of the next accounting period only.



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