Summary of abstracts 16, 18, 19 and 22 from the urgent issues task force

The main role of the Urgent Issues Task Force (UITF), a committee of the Accounting Standards Board (ASB), is to assist the ASB whenever unsatisfactory or conflicting interpretations of existing accounting standards or companies legislation have developed. As its name implies, the UITF deals with problems quickly and produces an “abstract” which is ratified and published by the ASB.

This article deals with four UITF Abstracts:

Abstract 16 is relevant for papers 10 and 13, the others for paper 13 only.

UITF 16 Income and expenses subject to non-standard rates of tax

The issue
Some transactions depend for their overall profitability on some or all of the income or expenditure being either non-taxable or taxable at a lower (or higher) rate than the standard rate. Examples include some leasing transactions, advances and investments made by financial institutions.

A few institutions have adopted a special accounting treatment for such transactions. This treatment entails changing the pre-tax profit and the tax charge by the same amount, so that a standard rate of tax is reported as a “grossing up” adjustment.

It may be argued in favour of this presentation that it helps in comparing the pre-tax results with those of other kinds of businesses, and of profits of different periods. Against this is the point that the grossing up, being notional, fails to reflect the true nature of the transactions.

The UITF Consensus
The UITF concluded that the grossing up treatment was not appropriate and that income and expenses subject to non-standard rates of tax should be included in the pre-tax results on the basis of the income or expenses actually receivable or payable.

The conclusion was based on the point that both the form and the substance of the transaction are that it bears tax at a non-standard rate and it should therefore be reported in those terms, in order to achieve a faithful presentation.

The UITF also considered whether any additional disclosure requirements were needed, and concluded that none was needed because there were already requirements in companies legislation and FRS 3, Reporting financial performance. Both require the disclosure of any special circumstances affecting the tax liability on profits, income or capital gains.

UITF 18 Pension costs following the 1997 tax changes in respect of dividend income

The issue

The Finance (No 2) Act 1997 ended the ability of pension schemes to reclaim a tax credit on dividend income. This will probably reduce the actuarial value of the assets in a pension scheme or increase the actuarial value of the liabilities. If the scheme is in surplus, the surplus will be reduced, and if it has a deficit, that deficit will increase.

The problem considered by the UITF was how this loss should be recognised. SSAP 24, Accounting for pension costs, requires pension costs to be recognised on a systematic and rational basis over the period during which the entity derives benefit from the employees’ service. The only relevant exception to this is if prudence requires a material deficiency to be recognised over a shorter period.

The UITF Consensus
The UITF concluded that the change in tax legislation was within the normal scope of the actuarial assumptions made; it was simply a change in the expected return on assets similar to those arising from tax rate changes. Hence, the loss should be spread forward over the remaining service lives of the current employees of the scheme in accordance with the normal requirement of SSAP 24.

UITF 19 Tax on gains and losses on foreign currency borrowings that hedge an investment in a foreign enterprise

When certain conditions are met SSAP 20, Foreign currency translation, permits certain gains and losses on foreign currency borrowings used to finance or provide a hedge against equity investments in foreign enterprises to be reported as reserve movements. Following FRS 3, Reporting financial performance, these gains and losses are now reported in the statement of recognised gains and losses.

As a result of changes in UK tax legislation, in some circumstances, for example when a matching election is not made for tax purposes, the gain or loss on retranslation of the borrowings is taxable.

The UITF had to decide how the tax effect of these gains and losses should be recognised.

The UITF Consensus
The UITF decided that the tax effects of gains and losses on exchange differences on borrowings that are reported in the statement of recognised gains and losses should also be reported there.

UITF 22 The acquisition of a Lloyd’s business

Background

Lloyd’s syndicates adopt a basis of accounting which recognises the long-term nature of their transactions. Underwriting accounts are not closed for at least three years. Syndicates are managed by managing agents who are usually entitled to commissions equivalent to a share in the syndicates’ profits, which will not be known until the accounts are closed.

The issue
The issue is whether, when a business such as a Lloyd’s managing agent is acquired, profit commissions receivable for unclosed years should be included in the assets. It may be argued that such profit commissions should be excluded because of their uncertainty. Another view is that they should be included at their fair value, following the basic principle of acquisition accounting.

FRS 7, Fair values in acquisition accounting, states contingent assets and liabilities not recognised in accounts may be included for the purpose of an acquisition.

The UITF consensus
The UITF concluded, predictably that all profit commissions receivable in respect of periods before the acquisition, including those relating to years not yet closed, should be recognised at their fair value.