Dear Mr Mike,
Assume that we have an asset with carrying value = 21, then revalued to 24, useful life remained is 3 years. Income tax = 20%. So:
1. If company chooses to realize the exceeding depreciation each year, is it correct if we base on the "net tax" value of surplus (3*(1-20%)/3yrs = 0.8)? Then each year Db Surplus/ Cr R.Earning 0.8
2. When and how the deferred tax from the revaluation is transferred to income tax charged to Profit & Loss in the future? Say, Db D.Tax Liability/ Cr Income Tax 0.2 in 3 years?
Tks you so much!
Ask the Tutor ACCA FR
Realize Revaluation Surplus & Deferred Tax
11y ago#1I don't remember this ever being asked and, if it has, it was certainly not at F7 level!
It really depends on what you do with the deferred tax on the revaluation.
Clearly the deferred tax liability will increase but are you going to charge the appropriate element to the revaluation surplus instead of simply taking it through p or l?
If the deferred tax goes to revaluation reserve then the (non-mandatory) annual transfer from revaluation to retained earnings can only be the reduced amount (0.8 in your example)
Ok?
I asked this because the mock test 2 in BPP revision kit (Up to June 2015) mentioned deferred tax of revaluation it in a note related to revaluation asset but NO realizing surplus to retained earning. Also in question 3 in Specimen Test 2014 (Quincy company), it also has a note about transferring revaluation surplus to retained earning, but luckily it IGNORED deferred tax. So a fellow student of mine combined 2 questions and came up with the question above about what happen if both deferred tax and transferring appear in the same time.
Tks for the answer but how about the treatment for deferred tax each year?
11y ago#3No affect unless there's a further revaluation
Once you've got the provision set up there's no need to adjust it unless there's a change in the value of the affected asset
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