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Dear Mike,
I wonder why the deferred tax liability is still 90 at YE 09, even though the asset is depreciated for accounting purposes but not for tax purposes. Therefore I would assume that the taxable temporary difference reduces to 79,8?
Many thanks!
Martin
Hi
I think you have to look at the issue this way. Upon the event of revaluation, a $300,000 surplus was recognised. This surplus will attract taxation which, at the current rate, amounts to $90,000.
It is irrelevant that the asset is being depreciated – the asset does not attract capital allowances. If, in the future, we sell for $500,000, no problem, no gain, no tax
But if we can sell it for its revalued figure, the a $90,000 tax liability accrues
OK?
Hi?Mike I have similar question with Martin.
I still don’t understand why deferred tax liability didn’t change.
If there is depreciation expense, then the total tax expense should be less than current tax expense charged by tax dep, right?
Hi,
I think that given the asset does not attract capital allowances then the difference between the carrying value under IFRS and the tax base is a permanent difference and so there is no deferred tax.
The only reason why there is deferred tax is due specifically to the revaluation, where any gain on disposal gives rise to a taxable temporary difference (i.e. we have to pay tax on any gain on disposal). The only way the deferred tax on this would change is if the revalued amount were to change, which it hasn’t, and therefore it remains the same.
I personally don’t recall anything similar to this appearing in any of the recent P2 exams, so don’t stress about it too much. It appears that yo understand the basics o of deferred tax and revaluations without this added difficulty.
Thanks
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