deferred tax on surplus on revaluation of FA

[kamranACA]

PROPOSED / MODEL ACCOUNTING ENTRIES


First entry to record revaluation impact

Fixed assets – Property, plant and equipment (Debit) 400

Surplus on revaluation of PPE (Credit) 400
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Second entry to record deferred tax impact on revaluation @35%

Surplus on revaluation of PPE (Debit) 140

Deferred taxation (Credit) 140
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Third entry to record depreciation for next year (@10% on WDV basis at carrying value of Rs. 1200)

Depreciation (Debit) 120

Accumulated depreciation (Credit) 120
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Last entry (first version) - for treatment of Incremental depreciation under section 235 (SRO 45) of CO84 read with IAS-16

Surplus on revaluation of PPE (Debit) 26
Deferred taxation (Debit) 14

Retained earnings in statement of changes in equity (P/L balance) (Credit) 40

(Rs. 40 represent incremental depreciation that will directly be transferred to retained earnings in statement of changes in equity. Corresponding proportional adjustment will be recorded in surplus and deferred tax accordingly).
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Last entry (second version)

Surplus on revaluation of PPE (Debit) 26
Deferred taxation (Debit) 14

Retained earnings in statement of changes in equity (P/L balance) (Credit) 26
Profit and loss account – tax gain (Credit 14

Some entities pass the last entry in this way, but in my personal opinion the first version is more appropriate because it is technically more suitable to record movement of reserves through equity without affecting P/L account of reporting year.
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It has been assumed that depreciation is charged using diminishing balance method.

Regards,


KAMRAN