Deferred Tax on Lan Revaluation

[jhpavel]

Dear Members,

If an entity revalue it's land and no intention to sell the land in future, does it have to recognise Deferred Tax?

Please advice.

Thanks,
Jakir

*** Expecting Mr. Kamran to respond my query also other member pls.

[moniacca]

Deferred tax results from the temporary differences or timing differences between the accounting value of assets and liabilities and their tax base (value for tax purposes). As after revaluation, a temporary difference will be created between its carrying value and its tax base so deffered tax asset/liablity should be recognised.

I hope it will help you.

plz correct me if there is any mistake.

Comments are appreciated.

[basit_namdar]

Land, Investments and debtor are the other things which are to be carried at orignal cost. So your CA and tax base will differ creating Temporary taxable difference.

[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,

[kamranACA]

Just wondered the spams put this thread on 28th page. It's strange.

Where has Admin gone?