Imagine a world with no deferred tax. Would it really be that bad a place? Well, for some, this world now exists and it isn't 1,400 light years from home. It's right here on our doorstep. Welcome to Micro-land.
In July 2015, the Financial Reporting Council (FRC) published 'FRS 105 The Financial Reporting Standard applicable to the Micro-Entities Regime'.
This standard sets out GAAP for micro-entities and can be adopted by qualifying micro entities, instead of the FRSSE, right away.
Micro-entity provisions for companies have been around for a couple of years now and, as yet, haven't really taken off - probably due to the significantly simplified presentation requirements for these very small, small companies.
However, as small entities are shifted across onto the more complex FRS 102 Section 1A, the FRSSE is removed and more small company information becomes freely available (see our previous post Kiss goodbye to your abbreviated accounts); these micro entities will start to look for something simpler. FRS 105 offers a more proportionate approach to accounting requirements. Micro-entity accounting may very well be the future.
28 Sections, about 100 pages and some simplification when compared to FRS 102 just about sums it up. Think of the twiddly bits in FRS 102 that you maybe don't see the point of and put a pen through them.
Fair valuing financial instruments. No. Unusual accounting for below market rate loans. No thanks. Revaluing assets. Can't do that. Share based payments. Nope. Effective interest rates...don't be silly.
Then comes deferred tax.
Now, I don't mind losing a few friends by saying that I wouldn't have clicked on my own article. I quite like the idea of deferred tax.
This idea that I've taken advantage of, say, a big annual investment allowance and so I'm in a situation where I've accelerated some capital allowances when I tally it up against the depreciation charge in my accounts.
I like the idea of saying 'yes, I know I haven't paid any real tax this year, but I'm a prudent accountant and I know that next year the tax charge will be comparatively higher because I've taken this benefit early...I'd better put something aside for that.'
Well, if you choose to move to Micro-land and live your life under FRS 105, you don't get wallys like me. You just aren't allowed to account for deferred tax.
If you (or your clients) are thinking about becoming a resident of Micro-land, you need to think about whether this and the other simplifications work for you and the users of the accounts. You will also need to think about the practicalities of unwinding historical transactions, the potential implications on distributable profits, what you need and want to show in the accounts, and what will happen when you grow too big for Micro-land and have to emigrate to FRS-102-Section-1A-land. Even from the name of it, that place doesn't sound a particularly nice place to live.
Click here if you don't like deferred tax.