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In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the carrying amount of the
building was $2m and it was revalued to $2·5m.
Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000 earlier in the
year, but subsequent discovery of defects reduced its value to $400,000. No depreciation had been charged on the sales
office and any impairment loss is allowable for tax purposes.
Mighty It Co’s income tax rate is 30%.In accordance with IAS 12 Income Taxes, what is the impact of the property revaluations on the income tax
expense of Mighty IT Co for the year ended 31 December 20X5?
A Income tax expense increases by $180,000
B Income tax expense increases by $120,000
C Income tax expense decreases by $30,000
D No impact on income tax expenseI am not unable to understand how they got the answer
The carrying value is 400,000 and since for tax purposes they allow impairment,the tax base is 400000 so there shud be no impact on tax but why the answer is C
Following your explanation, I understand that the tax base 400,000 as impairment is allowable for tax but even the carrying value in the accounting statments will be 400,000 as even though we are not depreciating we do impairment loss to the asset in the financial statements and so even the carrying amount will be 400,000 which gives a rise to the taxable temporary difference of 0 and there is no impact on tax!
Please help. thanks mike
One way or another, that original cost of $500,000 will be allowed against the profits for tax purposes
With the devaluation by $100,000, the entity will have to write off that amount against profits – probably through the figure for cost of sales
The question tells us that the impairment loss is allowable so there’s no need for any add-back in the corporation tax computations
The effect is that, without that devaluation, the tax charge would have been $30,000 higher
Equally, if the question had stated that the impairment loss was not allowable for taxation, there would have been no affect on the originally calculated tax charge
As for the head office revaluation, that $500,000 will be credited to the Revaluation Reserve and debited to TNCA
There will be an increase in the deferred tax liability acknowledging that, as a result of that revaluation, there is a potential increase in the tax liabilities because the entity will try to claim depreciation against the profits of future years but capital allowances will be calculated only on the original cost so $500,000 of that building will NOT be allowable as a tax deductible amount
Now, we need to increase the deferred tax liability so …. increase the amount of liability carried forward in the deferred tax account by 30% of the $500,000 = $150,000
But that 30% of $500,000 relates specifically to the head office revaluation so the tax that relates to that revaluation should be transferred to the Revaluation Reserve
Now, we have increased the deferred tax carry forward liability by $150,000 on the debit side of the deferred tax account and we have now decreased the deferred tax amount (to transfer to the current tax account) by a credit of $150,000
There is therefore NO affect on the current tax expense for this year in respect of the revaluation of the head office
I suggest that you work through the mini-exercises on taxation towards the end of the free F7 course notes!
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