Deferred Tax on Lan Revaluation

[kamranACA]

You have put forward a very interesting question.

Please note that an SIC Interpretation i.e. SIC 21 was issued during the year 2000 upon consensus of the then Standing Interpretation Committee reached during August 1999. This SIC-21 has concluded the issue of whether or not the deferred tax arises on Non-depreciable asset’s fair valuation/revaluation under IAS-16. The consensus given in the SIC is as under

QUOTE

The deferred tax liability or asset that arises from the revaluation of a non-depreciable asset in accordance with IAS 16.31 shall be measured on the basis of the tax consequences that would follow from recovery of the carrying amount of that asset through sale, regardless of the basis of measuring the carrying amount of that asset.

Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset.

UNQUOTE

The above interpretation implies that you have to decide this matter in view of what exactly your tax jurisdiction carries with respect to the taxability of recovery i.e. gains/profits upon ultimate sale of such non-depreciable asset.

For example, if the ultimate recovery i.e. gains/profits upon disposal of such asset are not taxable under law (whenever such disposal will be made) then no deferred tax should also be recognized with respect to the revaluation surplus arising out of any fair valuation under IAS-16 as well.

You can consider the example of Pakistan where, as per Constitution, land is subject to provincial levies and there is no (federally administered) income tax on the gains/profits arising out of its sales/disposal. Here, since the ultimate recovery is not taxable, any revaluation done for land and recognized in the financial statements will also not be subject to creation of deferred tax. Obviously; because eventually you don’t have to pay income tax on any increase in fair value of such land at the time of sales/disposal.

Therefore, (depending upon how you treat the gains/profits on the sales/disposal of Land in your country), the revaluation surplus of land is not subject to creation of deferred tax provisions.

Please note that SIC-21 is still enforced in relation to IAS-12.

Regards,