7.2 As might be expected, the three exclusions above are sometimes rolled into one exclusion, gathering together the three concepts.
8 Change in Accounting Policy or Practice
3.1.7 such Tax Liability would not have arisen but for a change of accounting policy or practice after Completion, except where such change is necessary so as to ensure compliance with generally accepted accounting principles and practice as existing at Completion; 8.1 UK GAAP (United Kingdom Generally Accepted Accounting principles and practice) and IFRS (International Financial Reporting Standards) have been playing an increasing part in the workings of the tax regime in recent years: the recognition of income and the timing of the deductibility of costs now both owe much to the various accounting standards. Section 46(1) CTA (formerly Section 42, Finance Act 1998) requires the profits of a trade to be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. A famous (or infamous) example of the power of accounting standards to have an impact on taxation was FRS 5, Application Note G and UITF 40: in combination they led to a very different interpretation of the recognition of income by businesses selling various types of professional and other services on the basis of time and materials. As many accounting and legal professionals will be aware, it was the interpretations within the above which resulted in much professional work in progress being included in accounts at sales value, rather than at cost. 8.2 There is a carve out from this exception to cover situations where the Company was not compliant with the accounting convention under which it purportedly reported prior to Completion. We therefore need to explain how the tax rules work differently in this situation. 8.3 It is a requirement of Financial Reporting Standard 3 (“FRS 3”) that a material adjustment in respect of a change of accounting policy is treated as a prior year item: this means that the opening balance sheet for the accounting period concerned, and the opening balance sheet for the accounting period for the previous year, are restated, as if the new policy had always been in force. This then has the impact that the figures for the current year, and the comparative figures for the prior year are both stated on a consistent basis, in compliance with the new policy. The cumulative impact of the change of policy up to the first day of the prior year will be adjusted in the Statement of Total Recognised Gains and Losses (“STRGL”, pronounced “struggle”). If a six year summary of results is provided with the financial statements, this exercise has to be extended over the entire 6 year period, so as to ensure comparability between the periods. This therefore requires the restatement of the opening balance sheet of the period 7 years ago onto the new basis.
8.4 The rationale for this approach is that it ensures that figures are compared on a consistent basis: if this accounting exercise was not completed, the profits of certain
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