FRED 19 Accounting for Deferred Tax - ACT Response to ASB

I apologise for the late response to your Exposure Draft. It has taken some time for the implications of your proposals to filter through to our membership. The main areas of concern expressed to us may be summarised as follows:

1. the restriction, arising from changes in accounting treatment, in distributable reserves available to pay dividends and/or rearrange the capital structure of a business to improve shareholder value.

2. the impact on financial covenants in loan documentation from the resulting reduction in reported net worth.

3. the provision of meaningful information to investors and analysts. Clearly, unnecessary subjectivity in the preparation of accounts should be eliminated and a company's accounts should reflect the full tax implications of all transactions that have already taken place. However, accounts should not be made up of meaningless mathematical differences or include large, long-term liabilities which do not present a fair picture of a company's financial position. If these principles are followed then we believe that the three areas of concern mentioned above can be adequately catered for in accounting for deferred tax. On balance we believe that the flow-through method is the one that best follows these principles and is also closest to complying with your Statement of Principles.

Our second choice would be to maintain the status quo. SSAP 15 may be subjective, as discussed below, but in our view is preferable to the other alternatives.