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Hi All,
From Kaplan book:
On 1 January 2008, Simone Ltd decided to revalue its land for the first time. A qualified property valuer reported that the market value of the land on that date was $80,000. The land was originally purchased 6 years ago for $65,000.
The required provision for income tax for the year ended 31 December 2008 is $19,400. The difference between the carrying amounts of the net assets of Simone (including the revaluation of the land in note (above) and their (lower) tax base as 31 December 2008 is $27,000. The opening balance on the deferred tax account was $2,600. Simone’s rate of income tax is 25%.
In the answer the difference of the year in DTL is partially recognised in OCI, meaning that DTL arises on revalued land.
Why does DTL arises on revalued land if it is not depreciated and no capital allowances are available on land for tax purposes? Or I am thinking about this wrong?
Thank you!
You shouldn’t think this way “if it wasn’t depreciated and no capital allowances are available”, then “there is no DTL”.
Because even though a DTL can arise from depreciation – this is just one of many examples, when DTL arises. So, it doesn’t exclude any other cases.You should follow this guidance: “Deferred tax should be recognised on revaluation gains…”. See Application of scenarios right before “test your understanding 2”
(also, you can read further IFRS 12, when deferred taxes arise from revalued non-depreciable assets)
So, your journal entries would be
1. To recognise gain on the land revaluation
Dr Land XX
Cr Reval surplus XX
And then recognise the associated deferred tax:
Dr Reval surplus XX x 25%
Cr Deferred tax XX x 25%
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