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 deferred tax on surplus on revaluation of FA
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kashif_0014
Unregistered Trainee

Pakistan
15 Posts

Posted - Jun 11 2010 :  6:58:54 PM  Show Profile
salam

can any1 plz explain deferred tax implication when an asset is revalued from cost to FV and there is revaluation surplus..
plz also explain the treament of incremental borrowing in this case, ie how deferred tax will be created when making an entry for incremental dep.

to start with, lets suppose the cost of the asset is 1000 and it is being depreciated at 10% .. after 2 years when WDV is 800 the entity revalues the asset to 1200 keeping the dep rate same ie 10%..therefore we hav a revaluation surplus of 400.. now plz continue further with general entries how to record the deferred tax while recording revaluation surplus and later incremental dep..

thanks

kamranACA
Partner

Pakistan
2499 Posts

Posted - Jun 12 2010 :  4:14:18 PM  Show Profile
PROPOSED / MODEL ACCOUNTING ENTRIES


First entry to record revaluation impact:

Fixed assets – Property, plant and equipment (Debit) 400

Surplus on revaluation of PPE (Credit) 400
____________________________________________________

Second entry to record deferred tax impact on revaluation @35%:

Surplus on revaluation of PPE (Debit) 140

Deferred taxation (Credit) 140
____________________________________________________

Third entry to record depreciation for next year (@10% on WDV basis at carrying value of Rs. 1200):

Depreciation (Debit) 120

Accumulated depreciation (Credit) 120
____________________________________________________

Last entry (first version) - for treatment of Incremental depreciation under section 235 (SRO 45) of CO84 read with IAS-16:

Surplus on revaluation of PPE (Debit) 26
Deferred taxation (Debit) 14

Retained earnings in statement of changes in equity (P/L balance) (Credit) 40

(Rs. 40 represent incremental depreciation that will directly be transferred to retained earnings in statement of changes in equity. Corresponding proportional adjustment will be recorded in surplus and deferred tax accordingly).
___________________________________________________

Last entry (second version):

Surplus on revaluation of PPE (Debit) 26
Deferred taxation (Debit) 14

Retained earnings in statement of changes in equity (P/L balance) (Credit) 26
Profit and loss account – tax gain (Credit 14

Some entities pass the last entry in this way, but in my personal opinion the first version is more appropriate because it is technically more suitable to record movement of reserves through equity without affecting P/L account of reporting year.
__________________________________________________

It has been assumed that depreciation is charged using diminishing balance method.

Regards,


KAMRAN
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kashif_0014
Unregistered Trainee

Pakistan
15 Posts

Posted - Jun 12 2010 :  6:55:13 PM  Show Profile
its so kind of u sir to give ur time in replying..

from your reply i have 2 queries, firstly how did we get incremental dep of Rs. 40 ? ( i thought it was Rs.20 as previously the dep expense was Rs. 100 and dep expense subsequent to revaluation is Rs. 120 so there is a difference of Rs. 20 as per my understanding )

secondly, i m still confused as to why are we recording deferred tax on revaluation as the surplus on revaluation will not be deductible for tax purpose . hence it must be permanent difference rather a temporary difference. so there must be no question of def tax on surplus.

thanks once again for being so helpful !
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kamranACA
Partner

Pakistan
2499 Posts

Posted - Jun 13 2010 :  7:38:48 PM  Show Profile
Written down value as at the date of revaluation was 800.

The appreciated value after revaluation was 1200.

I assumed that diminishing balance method of depreciation is being used, so appreciated value is arrived at by summing up (opening wdv) 800 and (surplus arising) 400.

The surplus arising was (1200-800) = 400; rate of depreciation 10% so the incremental depreciation will be 40. It's simple.

Let me know if it is not clear.

Surplus on revaluation is not a permanent difference. It's a lengthy subject and much of time is needed to clarify how it is not permanent.

Yet IAS-12 says that the deferred tax pertaining to items directly reported in equity has to be recognised in equity and no impact will go to profit and loss account. You might have seen that liability of deferred tax on surplus was not created by debiting tax expense/provision. Rather, surplus has been debited to comply the requirement of IAS-12.

For the issue why it is not permanent difference, I suggest you to study IAS-12 (specially paragraphs 61A to 65A) and interpretations issued under it specially pertaining to the one which deals with surplus arising on revaluation of land.

Regards,


Edited by - kamranACA on Jun 13 2010 7:40:21 PM
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kashif_0014
Unregistered Trainee

Pakistan
15 Posts

Posted - Jun 14 2010 :  10:15:14 AM  Show Profile
i m sorry i dint read your assumption of reducing balance method thats y got wrong figure of incremental dep..

i had already read those para of IAS 12 but was not able to understand y it is not a permanent difference. what i understood from those para was that while transfering incremental dep from revaluation surplus account to retained earning, its transferred net of deferred tax.

anyhow i would look up at other sources for clarification.

thanks for replying sir !
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kamranACA
Partner

Pakistan
2499 Posts

Posted - Jun 14 2010 :  3:18:33 PM  Show Profile
Plz study the appendices of IAS-12 and its IE for clarity.

Regards
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