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I have this question in mind which is why do we record Deferred Tax on Revaluation Surplus of the asset when in actual Tax authorities will not allow us the depreciation on the revaluation surplus of the asset? and what about the transfer of revaluation surplus to retained earnings for incremental depreciation
Hi,
The key to your question is to appreciate that what we are doing with deferred tax is matching the accounting treatment to the tax treatment. So, if we are revaluing an asset then we will be paying higher tax in the future based on the current year’s revaluation. We therefore need to recognise this higher future tax in the current period as that is when the revaluation has taken place that will give rise to the extra tax expense.
Also, remember that IAS12 looks at the temporary differences based on the value of assets/liabilities on the SFP, it doesn’t look at the income/expenditure that goes through profit or loss.
Thanks
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