Second step

Then deduct any amounts representing the extent to which, comparing the two bases, profits were overstated (or losses understated) on the old basis:

1. 1.

   Receipts which were taken into account in a period before the change, to the extent that they would not have been taken into account for such a period if the profits had been computed on the new basis.

2. 2.

   Expenses which were not taken into account in computing the profits of a period before the change, to the extent that they would have been taken into account for such a period if the profits had been computed on the new basis.

3. 3.

   Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent to which they are not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis.

An amount so deducted may not be deducted again in computing the profits of a period of account.

Third step

In the case of a profession or vocation adopting a new accounting basis to comply with section 42 (true and fair view), a further deduction may be made by way of adjustment in respect of any change of accounting basis before 6th April 1999.

The amount deductible is calculated as follows—

1. A.

   Add together the amounts by which profits were overstated (or losses understated) by reason of the previous change of accounting basis:

   1. 1.

      Receipts to the extent that by reason of the change of accounting basis they were brought into account in more than one period of account.

   2. 2.

      Expenses to the extent that by reason of the change of accounting basis they were not deducted in any period of account.

   3. 3.

      Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent that they were not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account following the change.

2. B.

   Then deduct the amounts by which profits were understated (or losses overstated) by reason of that change:

   1. 1.

      Receipts to the extent that by reason of the change of accounting basis they were not brought into account in any period of account.

   2. 2.

      Expenses to the extent that by reason of the change of accounting basis they were deducted in more than one period of account.

   3. 3.

      Deductions in respect of opening trading stock or opening work in progress in the first period of account following the change of accounting basis to the extent that they were not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change.

An amount may not be so deducted if it has previously been brought into account; and it may not be deducted again on a subsequent change of accounting basis.