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HMRC internal manual

Business Income Manual

Specific deductions: provisions: accounting standards and GAAP: quantification

Section 21 of FRS102 requires provisions to be measured at the ‘best estimate’ of the amount required to settle the obligation at the reporting date, having regard to the information available to the business at the time that the accounts are approved. The ‘best estimate’ is defined in Section 21 of FRS102 as the amount the business would rationally pay to settle the obligation at the reporting date, or to transfer it to a third party at that time.

Provisions should be discounted ‘where the effect of the time value of money is material’. This will clearly be the case for many long term liabilities such as the cost of decommissioning nuclear power stations, but the effect of the time value of money may also be material for shorter term liabilities, in which case they too should be discounted. There is no rule of tax law that permits a provision to be brought in to account for tax purposes without a discount where the figure in the accounts has been, or ought to be, discounted in accordance with Section 21 of FRS102.

Section 21 of FRS102 requires the ‘unwinding’ of a discount (that is the way in which the provision builds up from its discounted amount to the eventual cash liability) to be recognised as a finance cost in profit or loss. For tax purposes the ‘unwinding’ of the discount should be treated as a further provision; in particular it is not a financial item within the scope of the loan relationship legislation (see CFM30000 onwards).