The Impact of FRS 102 for SMEs: Corporation Tax, Distributable Funds and Credit Rating

How will the introduction of FRS 102 impact on companies’ corporation tax liabilities, distributable funds and credit rating?

The Generally Accepted Accounting Practice in the UK (UK GAAP) is changing to an abbreviated version of the International Accounting Standards (IAS). Whilst this will change the formats and disclosures in financial statements, it will also alter the way the figures in the accounts are calculated. The rules for calculating corporation tax are reliant on the UK GAAP and these changes will impact on companies’ corporation tax liabilities.

These adjustments will mean the funds available to distribute as dividends to the shareholders (the distributable reserves) will change and may restrict the amount of dividend a company can pay.  As always, adjustments which reduce corporation tax are likely to reduce profits and weaken the balance sheet. There is a trend for more stakeholders (customers, suppliers and banks) to view companies’ accounts or credit rating reports, therefore the presentation of the accounts will need to be considered.

Who will this affect and when?

The changes will affect all UK companies not currently producing accounts under IAS’s. The timing of the changes and the standard which a company follows depends on the company’s size. A company must fall under two of the three criteria, in the table below, to qualify for the various sizes.



Balance Sheet Total


Accounting Options





FRSSE 2015, FRS 105 or FRS102

FRSSE 2015 for one year only




FRSSE 2015

Small Company




Section 1A of FRS 102 or FRS 102

Medium sized Company*




FRS 102

* New rates for accounting periods start on or after 1 January 2016

FRS 102 and Section 1A of FRS 102

The new UK GAAP or FRS 102 came into effect for the accounting period beginning on or after 1 January 2015, which in most cases will apply to year ends from 31 December 2015 onwards. Section 1A of FRS 102 offers reduced disclosure and presentation requirements to companies that meet the criteria. The way the figures are calculated is the same so companies applying this section will still be affected by the impact on corporation tax; the amount available to distribute as a dividend; and the value of the balance sheet.

FRSSE 2015

As the Financial Reporting Standards for Small Entities 2015 (FRSSE 2015) is based on old UK GAAP, companies which meet the thresholds can delay the move to the new regime by adopting FRSSE 2015. This will only be available for one year; therefore all companies will have to move over to the new regime for accounting periods beginning on or after 1 January 2016. Generally, this will apply to year ends from 31 December 2016 onwards and, for companies adopting the FRSSE; they will most likely opt for FRS 102 Section 1A.

FRS 105 Micro-Entities

Companies that meet the micro-entity thresholds can apply FRS 105. This will enable them to avoid the fair value changes incorporated in FRS 102 reducing the changes affecting tax. The main attraction for FRS 105 is the vastly reduced disclosure requirements, only the balance sheet and three notes are required to be filed with Companies House. However, the reduction in publicly-available information will have a negative impact on credit ratings.

What are the likely changes?

Holiday Pay Accrual

Companies will now have to accrue for holiday pay under FRS 102. This will reduce the company’s tax as long as the holiday is taken within nine months of the year end. However, it will be an additional liability on the balance sheet.

Lease Incentives

The current system requires lease incentives to be spread over the period of the lease up to the first rent review. Under FRS 102, the incentives will need to be spread over the expected life of the lease. The rent charge in the profit and loss account will reduce slightly each year, increasing tax, as the overall cost is spread over a longer period.

Goodwill and other intangible assets

Although this area has attracted much attention the basic principal behind the writing off or amortising of goodwill has not changed; it must be written off over its useful economic life.  FRS 102 requires goodwill to be broken down into it component parts and each part to have its useful economic life assessed separately.

Old UK GAAP included the assumption that generally the useful economic life would not be more than 20 years. Under FRS102, where a reliable estimated life cannot be calculated 5 years is the maximum, implying intangibles assets should be written over a shorter life under FRS 102.

This may lead to companies reviewing the value include in their accounts for these kinds of intangible assets and making impairment write offs where required. As the tax rules have not changed with the implementation of FRS 102, where it was previously allowable, the amended amortisation and any write offs will be allowable for corporation tax. In a number of cases, the goodwill will not be allowable and the increase in amortisation may be significant; resulting in a reduction of the balance sheet and distributable reserves without any tax saving.

Currency Contracts and More Complex Financial Instruments

The changes will require more currency exchange contracts and complex financial instruments to be recognised on the balance sheet. This may result in one-off tax adjustments on adoption and greater volatility in accounting and taxable profits going forward.

UK Subsidiaries of Overseas Parents

When determining the presentational currency, companies must now consider the influence of the parent company in addition to the currency in which funds from financing activities are generated and the receipts from operating activities are usually retained. This might mean a more advantageous currency for tax or presentation can be used.

Defined Benefit Pensions

FRS 102 requires all deficits on multi-employer defined benefit schemes to be provided. The amount allowable for tax will not change as it will continue to be the actual amount paid. Where applicable, this will lead to reduced distributable reserves and increased liabilities.

Revaluations and Deferred Tax

Despite changes to the way revaluations are disclosed in the accounts, the corporation tax treatment will not change. What has changed is the requirement to provide for deferred tax on capital revaluations. Whilst this will not affect the current year’s corporation tax liability it is likely to weaken the balance sheet

For further information about FRS 102 and how it will affect your business, contact Ian