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Hi Mike,
Right so I have been doing some work on deferred tax, and I am ok with the concepts and have worked through some examples. My confusion lies with deferred tax impact on OCI.
In my textbook it says that the most common examples of this relates to revaluation of NCA. and then goes on to give a set of rules:
1) when asset is revalued upwards- its increases the carrying value of the asset but it does not affect the tax base.
right here is where the book has lost me. because.. isn’t the value of the asset used to calculate the tax base.. why would it be any different with an upward revaluation of an asset. lets me give you a numerical example.. to see if that helps.
lets say we have a NCA= 100, depreciation= 10, and the taxable allowance for the first year is 40.
CV= 100-10= 90 right?
and TB= 100-40= 60 right?so lets say in the same year we revalue the asset and it increases to 150. we will have to rework CV and TB.
CV= 150-10= 140
TB= 150-40=110?The notes in the text book seem to suggest that a revaluation upwards will increase the CV as we can see above.. but should not affect the tax base. Super confused.. since the tax base is made up from two components- the asset value and the taxable allowance…sir.. please can you help.
“since the tax base is made up from two components- the asset value and the taxable allowance” – I always understood that the tax base was made up of the cost of the asset less tax allowances to date!
Why would the Revenue authority allow you more tax allowances just because you revalue your assets?
Further more, in your example, if the asset increases to 150, the carrying value is 150 and not 140 as you have suggested
So my answer to your example would be carrying value of 150 and tax base of 40
hhm..- i see your point about why the tax authority would allow you more tax allowance just because you revalue your asset. ok it makes sense. thanks
the only point that has confused me is-” Further more, in your example, if the asset increases to 150, the carrying value is 150 and not 140 as you have suggested” please could you explain the point again in layman’s terms. so lets say the asset is 100. Depreciation is 10… cv will be 90. then the asset increases in value to 150… and there is more depreciation of 10.. why would the carrying value not be 140?
There’s a 60 revaluation increase from 90 to 150
So Cr Revauation Reserve 60
Now, where’s the debit?
The first 10 will be debited to the Accumulated Depreciation Account and then 50 more will be debited to the asset account
That leaves us with an asset account balance of 150 and zero in the accumulated depreciation
OK?
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