amount of the surplus or deficit in the pension scheme. The profit and loss account should include the cost relating to providing the benefits relating to that period. This amount is determined by the actuary and may be far removed from the contributions actually paid to the scheme in the year. For various reasons the deferred tax effects from this treatment are shown as part of the FRS 17 provision on the balance sheet. 3.6 The accounts of each company in a group will record its stocks of goods for resale at the lower of cost or net realisable value. These measures will be applied to each company as a separate entity. If chemicals are manufactured or bought by Stanton Chemicals Limited for £8 per litre and then sold to its wholly owned subsidiary, Ixworth Cleaning Limited for £10 per litre, the individual accounts will record the cost of the chemicals at £8 and £10 respectively. If Ixworth Cleaning Limited has 60,000 litres in stock at the year end, it will therefore record these in its accounts at a cost of £600,000. However, if consolidated accounts are produced, the profits of £120,000 made by Stanton Chemicals Limited are unrealised as the stocks have not yet left the group - they remain on the balance sheet of Ixworth Cleaning Limited at a value which includes a profit of £120,000. For the consolidated accounts these stocks are therefore reduced in value from £600,000 to £480,000. Tax has however crystallised in Stanton Chemicals Limited in respect of the profits made on these sales. This tax has crystallised before the profit is realised in group terms, and therefore the charge is deferred to the next period, when the stocks will be sold. 3.7 It should be noted that, under UK GAAP, the revaluation of a fixed asset does not result in the recognition of a deferred tax liability, representing the tax on the uplift in value. The reason for this is that this is not consistent with the conceptual framework on which UK GAAP is built. The act of revaluation has no discernible effect on the tax liabilities of the company. There is deferred tax under IFRS on such a revaluation. 3.8 If however a company follows a policy of continuous revaluation of assets, such as the use of a mark to market approach, then the tax timing differences should be recognised. 3.9 Tax that could be payable on any future remittance of the past earnings of an overseas subsidiary or joint venture should be provided for only to the extent that dividends have been treated as receivable in the UK.
4 The Discounting of Deferred Tax Liabilities
4.1 Liabilities are normally recorded in financial statements at the amount at which they are to be settled. They are not usually discounted to reflect any delay in their settlement. This makes eminent sense as most liabilities are either to be settled within a relatively short period of the year end or they are entitled to interest to reflect the delay in their settlement. There are one or two exceptions to this basic rule: one of these is in respect of pension fund liabilities. These are normally long-term liabilities and they may have an average payment date of 16 or more years. When accounting for pension fund obligations the future liabilities are discounted by the actuary to reflect the time period until settlement.
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