Accounting policy and departures from GAAP

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Accounting policy and departures from GAAP
  • Background
  • Accounting for loan relationships
  • Change of accounting policy
  • Departures from GAAP
  • Classification issues

This guidance note considers the accounting rules governing loan relationships and the tax law applicable if a company departs from those rules.

Background

The basic measure of the profits of a company chargeable to corporation tax in the UK is the profit before tax (PBT) figure as reported in its statutory accounts. Consequently, the tax return of a UK company is generally completed by taking the PBT for the financial period as reported for accounting purposes and making adjustments to that figure only to the extent expressly required by UK tax law. The accounting treatment of any transaction is therefore fundamental to its tax treatment. Understanding the basic accounting treatment of an item and its acceptability for tax purposes is a crucial part of preparing a tax computation.

For further information on the rules governing the computation of profits for corporation tax purposes and the required adjustments to accounting profits, see the Trading income ― general principles guidance note.

UK companies are required to follow both commercial law and ‘generally accepted accounting practice’ (GAAP) when preparing their financial statements. UK GAAP is regulated by the Financial Reporting Council (FRC) using a series of technical statements called ‘Accounting Standards’. The Accounting Standards have the force of law, cover a broad range of topics, and are regularly refined and updated.

UK GAAP has historically been developed and published wholly in the UK, albeit with regard to the evolution of practice in other territories, especially the US. However, in recent years there has been a drive to achieve more harmonious methods of accounting throughout the developed economies to better reflect global trade and enable effective comparison between business entities in different territories.

Introduction of IFRS

In 2005, the UK added EU adopted International Financial Reporting Standards (IFRS) as an acceptable alternative to the body of UK-produced standards. Under

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