BIM46535 - Specific deductions: provisions: accounting standards and GAAP: provisions following FRS12

FRS12 does not change our view of tax law but it clearly has changed GAAP. In particular many provisions, which formerly accorded with GAAP, will no longer do so. It follows that those provisions, even if they were formerly allowable for tax purposes, will no longer be. In our view there is no rule of tax law that permits provisions made on a now superseded basis to be 'run off' on that basis for tax purposes when the accounts adopt the FRS12 basis.

For periods for which FRS12 has effect it is no longer acceptable to make:

• Provisions for ‘future operating losses’ that is, losses that will or may arise from obligations entered into subsequent to the balance sheet date. For an example of a future operating loss see Meat Traders Ltd v Cushing (1997) SPC131.
• Restructuring provisions until the business has a ‘detailed formal plan’ for restructuring and has created a ‘valid expectation’ in those affected that it will carry it out.
• Provisions where the only event that might require them is an unpublished decision of the directors.
• Provisions for future expenditure required by legislation where the business could avoid the obligation by changing its method of operation, for example by stopping doing whatever is affected by the legislation.
• Provisions for future repairs of plant and machinery owned by the business (i.e. the accounting policy adopted by Britannia Airways); instead the depreciation charge of new plant should recognise its loss in value until it is first repaired and thereafter the repairs charges should be capitalised and amortised. FRS15 is more specific on repairs and other expenditure on tangible fixed assets. Although provisions for future repairs of owned assets are not permitted within FRS12 a provision can still be made where the asset is held under an operating lease which contains a repairing obligation (for example, tenants’ repairing leases of property). The obligating event is the signature of the lease, so a provision should be built up to reflect the probable liability under this obligation.