4.2 A second example where discounting may be applied is in respect of deferred tax liabilities: this is permitted but is not obligatory under FRS 19. Discounting is normally only appropriate when it makes a material difference. This will normally arise when the timing differences may not reverse for some considerable period such as with very long life assets. 4.3 We are not exploring the mechanics of the discounting of deferred tax liabilities. However, it is important to understand whether or not the Company has discounted the deferred tax provision for the time value of money. This should be evident from the accounting policies or the other notes to the financial statements. 5.1 The classic tax covenant generally steers well clear of deferred taxation balances. One of the very few exceptions is that the asset components of the deferred tax account are recognised by the Buyer as being of value: therefore the protection of the tax covenant is extended to embrace them. This is done by including such assets within the definition of a Buyer’s Relief. There are four components to the classic definition of Buyer’s Relief, and the first one is: (a) any Relief to the extent that such Relief has been taken into account in computing and so reducing or eliminating any provision for deferred Tax which appears in the Completion Accounts, or which but for such Relief would have appeared in the Completion Accounts or was taken into account in computing any deferred Tax asset which appears in the Completion Accounts (“ Deferred Tax Relief ”). 5 Deferred Tax Relief - One of the Buyer’s Reliefs
5.2 If we return to the example of Hauleigh Horsegear Limited, the gross and net values of the asset components of the deferred tax account in the previous year are:
Gross
Net at 28%
Capital allowance pools
1,849,000
517,720
General bad debt provision
350,000
98,000
Unpaid pension contributions
80,000
22,400
Tax losses carried forward
580,000
162,400 _______
_________
Total
2,859,000
800,520
5.3 Therefore if the shares in Hauleigh Horsegear Limited had been sold sometime after the date of the accounts of the previous year, then the above balances would have represented the Deferred Tax Relief component of Buyer’s Relief. This is on the assumption that the transaction did not involve completion accounts.
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