accounting periods would either benefit or suffer from the impact of the change in the accounting policy.
8.5 We can demonstrate this point with an example: Thornham Care Homes is a company with charitable objects; it has previously accounted for legacy income as such legacies are received. Following a change of auditors it is informed that legacies should be accounted for as soon as they can be reliably measured. Therefore an amount of £250,000 is included in the closing balance sheet for those legacies which have been notified but not yet received. The figures for the previous two year ends were £200,000 and £280,000 respectively. 8.6 If the results for the year of change were the only year that showed this new treatment there would be a windfall in that year, as an impact of introducing the new policy. In fact the result of the policy change is that the surplus for the current year is increased by £50,000 (being £250,000 less £200,000) and the surplus for the prior year is reduced by £80,000 (being £200,000 less £280,000). 8.7 The tax rules relating to a change of accounting principle or practice which give rise to a prior period adjustment are set out in Sections 180 to 182, CTA (formerly Section 64 and Schedule 22, Finance Act 2002). The effect of these rules is that the impact of the change is recognised for tax purposes in the accounting period in which it occurs, assuming that the change was from one acceptable basis to another. Therefore, if a new accounting standard was introduced after Completion which had an impact on the measurement of profits, the cumulative effect of the new standard would be recognised in the tax computations of the accounting period in which it occurred: this is despite the fact that financial reporting would treat this as a prior period adjustment. 8.9 If the change was from an unacceptable basis to an acceptable one, the computations of the earlier years are reopened and the tax is recomputed on the acceptable basis. We can see the operations of this from a further example. 8.10 Stoke Ash Properties Limited builds properties on a speculative basis, for sale when completed. The accounting for the costs of the work in progress (i.e. the part- completed properties) is governed by Statement of Standard Accounting Practice No. 9 (“SSAP 9”), as it reports in accordance with UK GAAP. The company did not include the costs of its direct work force or related overheads in the work in progress as required by SSAP 9, and the Buyer needs to remedy this after Completion. The Buyer has assessed the value of the properties being constructed in formulating his offer for the shares. In these circumstances the extra tax relates clearly to the value that the Sellers are to receive for their shares. If the Company continues at exactly the same level of activity this extra tax would be a permanent cash flow loss to the Buyer, representing an accelerated payment of tax. If the activity level at Completion was unusually high, then there is the prospect of a dispute in respect of whether or not there is a corresponding saving. This is dealt with in chapter 15 below. 8.8 The rules in Sections 180 to 182 CTA also apply to a change from using UK GAAP to preparing accounts in accordance with International Accounting Standards (“IFRS”).
8.11 Gislingham Woodcrafts Limited manufactures children’s toys for stock and has a product range which it sells in various retail outlets. It has also failed to apply SSAP 9
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