Don’t Defer your Tax Accounting by Dympna Cassidy and Brian Murphy
Don’t Defer your Tax Accounting
by Dympna Cassidy and Brian Murphy
FRS 102 reporters must consider the guidance in the January 2022 version of the Financial Reporting Standards Applicable in the U.K. and Republic of Ireland (“FRS 102”) when preparing their statutory financial statements. Section 29 Income Taxes (“Income Taxes”) should be consulted on the accounting for matters pertaining to income taxes.
The scope of Section 29 requires careful consideration and the glossary of FRS 102 defines “Income taxes” as all domestic and foreign taxes that are based on taxable profits. “Income taxes” includes both current tax and deferred tax in conjunction with value added tax (“VAT”) and other similar taxes. Section 29, therefore, has many facets.

In practice, deferred tax creates many questions when the guidance is being pragmatically applied to various situations. For example, International Financial Reporting Standard (“IFRS”) reporters noted some challenges in interpreting how deferred tax should be applied to leases when the new IFRS leasing standard was issued. To address the diversity in practice, the International Accounting Standards Board (“IASB”) had to issue a narrow scope amendment to IAS 12. The accounting for deferred tax also receives quite a lot of scrutiny from external auditors, internal decision-makers and accounting regulators alike.

The accounting for deferred tax in your accounting records requires an understanding of the core concepts. From an FRS 102 perspective, some examples include deferred tax liabilities, deferred tax assets, sufficient future taxable profits, taxable and accounting profits, substantially enacted rates, and permanent and timing differences. There are also heightened considerations concerning the recognition and measurement of deferred tax assets due to recoverability considerations and specific rules around discounting and the offsetting of deferred tax assets and liabilities. The successful accounting for deferred tax requires not only a knowledge of the core definitions, but also the exceptions in conjunction with an in-depth knowledge of the guidance for specific balances, for example, business combinations. Topical areas such as Pillar 2 and the impact of climate-related risks on entities also create bespoke deferred tax considerations for companies.

Getting your deferred tax accounting correct is not only salient from the perspective of presenting appropriate statutory financial statements, but also from the perspective of reducing volatility within the financial statements. It also assists FRS 102 reporters in understanding future obligations to pay taxes that are based on profits that have already been earned. This ultimately supports the management of cashflows associated with taxes and signposts the quantum of cash that is needed to pay tax bills once the deferred tax becomes current tax.

A deferred tax liability is defined in the glossary of FRS 102 as income tax payable in future reporting periods in respect of future tax consequences of transactions and events recognised in the financial statements of the current and previous periods. So it reflects a future outflow payable by the entity. On the other hand, a deferred tax asset reflects a future tax deduction i.e. a benefit to the entity. Section 29 of FRS 102 defines them as income taxes which are recoverable in future reporting periods in respect of:

  • future tax consequences of transactions and events recognised in the financial statements of the current and previous periods;
  • the carry forward of unused tax losses; and
  • the carry forward of unused tax credits.

The threshold for recognition of a deferred tax asset is higher than a deferred tax liability. Prior to the recognition of a deferred tax asset, an entity must ensure that there are sufficient future taxable profits against which the deduction can be recovered. An entity is required to challenge itself by assessing whether it is considered probable that it will have sufficient taxable profits available in the future to enable the deferred tax asset to be recovered. There is also emphasis placed on “probable” which is defined in the glossary of FRS 102 as “more likely than not”. Unrelieved tax losses and any other deferred tax assets can only be recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. The fact that there are unrelieved tax losses in the first instance is strong evidence that there may not be other future taxable profits against which the losses will be relieved. 

When it comes to the assessment of whether a deferred tax exists at the year-end that needs to be captured in the statutory financial statements, Section 29 requires a “timing difference plus” approach to be taken. Timing differences occur when there is a difference between the accounting and taxable profit or loss. Accounting profit or loss is the amount calculated using an accounting basis i.e. FRS 102, and is the amount presented in a company’s profit or loss or total comprehensive income. The taxable profit or loss is the amount for a reporting period upon which income taxes are payable or recoverable, determined in accordance with the rules established by the taxation authorities. As a result, there can be differences between the accounting and tax profit or loss which can cause a timing difference.

The “timing difference plus” approach requires deferred tax to be recognised on all timing differences, however, there are a number of exceptions to this. For example, unrelieved tax losses and other deferred tax assets, as mentioned earlier, can only be recognised to the extent that it is probable that they will be recovered either against the reversal of deferred tax liabilities, or other future taxable profits. In addition, no deferred tax is recognised on permanent differences, for example, a grant which is not subject to tax or an expense that is disallowable for tax purposes. There is however an exception to permanent differences relating to business combinations. Again, this re-emphasises the need not only to be familiar with the core definitions in Section 29 but also the exceptions . The “plus” in the “timing difference plus approach” refers to the required recognition of deferred tax on asset revaluations and on assets (except goodwill) and liabilities arising on a business combination.

Applying these core concepts to a simple example, let’s assume the following:

Company A, which has a year-end of 31 March 20XX operates a defined contribution plan for its employees. The Company pays the annual charge for the plan in advance and tax relief is provided on the plan in the accounting period in which the payment is made. As the contributions have been paid in advance, the tax relief is greater than the expense recognised in the profit and loss account for accounting purposes. This is because the advance payment for accounting purposes is recognised as a prepayment and released to the profit and loss account over time, however, the full tax deduction was allocated when the annual charge was made. In the following period, the financial statements will have those advance contributions charged as an expense, but no tax relief will be available. This is a timing difference which would result in a deferred tax liability.

Some other salient technical considerations pertaining to deferred tax include, but are not limited to, discounting what rate is used to calculate deferred taxes, and the offsetting of deferred tax assets and liabilities. It should be noted that the discounting of deferred tax assets or liabilities is prohibited applying Section 29 of FRS 102. This is helpful from a practical perspective as, if required, this would create complexities and require detailed schedules to understand the expected timing of reversals.

Section 29 also requires the application of a substantially enacted tax rate. There are also additional considerations in relation to the tax rate applied in the calculation of deferred tax, for example, concerning profits affected by distributions and balances such as investment property which is recognised and measured using the revaluation model.

The offsetting of deferred tax assets and deferred tax liabilities is permitted only where certain conditions have been met. Specifically, the entity must have a legally enforceable right to set off current tax assets against current tax liabilities. They also must relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

For those with group members applying both IFRS and FRS 102 it should be noted that there are distinct differences in the approach outlined in Section 29 of FRS 102 requiring a “timing difference plus” approach rather than the “temporary differences” approach as outlined in IFRS’s equivalent income taxation standard IAS 12. In terms of detail, whilst the standards are fundamentally different, generally, you would expect the FRS 102 approach to give the same answer as the IFRS one. Other areas of difference include convertible debt and business combinations.

Interestingly, FRED 82 brings quite significant changes to FRS 102 including greater alignment with IFRS on some core topics, however, it does not address deferred tax. Section 29 remains broadly unchanged with the exception of the inclusion of inserted guidance about uncertain tax positions. As a result, the core differences between IFRS and FRS 102 on the topic of deferred tax will continue to exist after FRED 82’s effective date of 1 January 2026.

Overall the application of the guidance in Section 29 of FRS 102 in relation to deferred tax requires a knowledge of the core terms in conjunction with the exceptions and specific rules on certain topics. It has a far reach over your financial statements as any balance with timing differences has the potential to create a deferred tax impact.

Dympna Cassidy headshot
Dympna Cassidy
Manager – Financial Reporting Advisory Deloitte Ireland
Brian Murphy headshot
Brian Murphy
Partner | Audit & Assurance | Consumer & Technology Business

Deloitte Ireland LLP