Wednesday 22 March 1995
Companies' reported earnings could be hit dramatically if plans being considered to change the rules on accounting for tax are adopted.
The changes put forward in Accounting for Tax, published by the Accounting Standards Board last week, would lead to many companies having to make substantial provisions, and see their ability to borrow reduced.
Companies based in Britain now take a "partial provision" approach to tax charges, under which deferred tax is provided for to the extent that it is likely to be payable, taking into account the tax effects of likely future transactions. But American and international standard setters have adopted "full provision" - which requires tax to be fully provided for in accounts.
This has been criticised, as it can lead to the build-up of large liabilities that may not be due for a long time. However, the board favours mitigating this by discounting at the effective rate of a goverment bond.
A third option, "flow through", under which no provision is made for deferred tax, is unlikely to be adopted, chiefly because it creates too much volatility in accounts.
Comments should be sent to the ASB by 16 June.
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